The euro rallied broadly but was slightly lower against the dollar on Monday as US stocks rose, though gains were likely temporary given doubts about the ability of eurozone members to tap bond markets. Traders said the euro found bids around the $1.3305 area.
Thinned trading due to holidays in Tokyo and London added to volatility in the euro, which now trades as a 17-country unit after Estonia gained full membership on January 1. "Arguably, there's increased risk appetite with US stocks up. I think that is having a positive impact on the euro, which can be positively correlated with equities," said Nick Bennenbroek, head of FX strategy at Wells Fargo in New York.
Declining US bond yields have also weighed on the US dollar, Bennenbroek added, indirectly benefiting the euro. Benchmark 10-year yields hit a high of 3.4395 on Monday, but slipped to 3.3362 by midday. Rising yields tend to support the greenback as they reflect stronger growth. They also enhance the attractiveness of some dollar-denominated assets to investors.
Many analysts though see continued strength in the dollar and further downside for the euro. Greg Anderson, senior currency strategist, at CitiFX in New York, said markets are "expecting further US economic outperformance in the first quarter" which is dollar-positive. He also expects further losses in the euro starting this week "until the market is satisfied with the outcomes for Portugal and Spain." Anderson added that the currency market will more or less have the same theme as last year, "with the euro being sold off because of the euro zone debt crisis."
The euro ended 2010 around 6.5 percent lower against the dollar, its biggest annual drop since 2005, weighed down by a debt crisis that hit Greece and Ireland. Investors are further worried about Spain and Italy, which later in the spring will be hunting for buyers of 400-billion euros in debt as maturing bonds fall due.
The single eurozone currency, however, climbed last week, hitting roughly three-week highs versus the dollar, as bears gave up their positions, frustrated by the currency's firm support at its 200-day moving average just below $1.31. Gains accelerated on Friday after stop-loss bids were triggered. In midday New York trading the euro rose 0.8 percent against sterling to 86.35 pence and gained 0.4 percent versus the yen to 109.06 yen. The euro hit a high of $1.3396, after reaching session lows around $1.3250. It last traded at $1.3373, little changed on the day.
Bids below $1.33 supported the pair, while offers were seen above $1.3350, keeping the upside limited, traders said. Some traders said the euro gained some ground as European equities rose after earlier euro selling by macro funds. The dollar rose 0.5 percent against the yen to 81.53 yen, having touched an eight-week low of 80.93 yen on trading platform EBS earlier on Monday.
"Without an upside surprise in the (US) job data this week, dollar/yen is likely to come under renewed pressure," analysts at BNP Paribas said in a note. US nonfarm payrolls due out on Friday are seen rising 126,000 in December, a Reuters poll showed. US Federal Reserve Chairman Ben Bernanke's congressional testimony scheduled for Friday will also be closely watched.
The dollar was down slightly against the Swiss franc to 0.9328 francs, after dropping to an all-time low of 0.9301 on Friday. The euro was flat against the Swiss franc at 1.2480 francs, still some distance away from its record low at 1.2398 francs hit last week.