The euro rose on Monday after an Italian newspaper said the International Monetary Fund was preparing an aid package for Italy, but doubts about the feasibility of the reported plan helped limit its gains. The euro pushed higher on short-covering after an unsourced report in Italian daily La Stampa said up to 600 billion euros could be made available at a rate of between 4-5 percent to give Italy breathing space for 18 months.
In response to media queries on Monday, an IMF spokesperson said there were no discussions with the Italian authorities on a program for IMF financing. The Italian newspaper report helped soothe market nerves as Italy plans to raise up to 8 billion euros in the bond market on Tuesday. But market players remained skeptical as the amount seemed beyond the IMF's current capacity.
Doubts grew after Dow Jones quoted international financial officials as saying reports of an IMF package for Italy were not credible, which caused the euro to trim some of its gains. Earlier, a source with knowledge of the matter told Reuters that contacts between the IMF and Rome had intensified but added it was unclear what form of support could be offered if a market selloff on Monday forced immediate action.
Official sources in Rome said they were unaware of any request for assistance from Italy. The euro was last changing hands at $1.3306, up 0.5 percent on the day, but down from an intraday high near $1.3345. While the IMF may potentially employ a stand-by or precautionary lending facility for Italy, aid amounting to 600 billion euros sounds far too large, said Ray Farris, head of foreign exchange strategy for Credit Suisse in Singapore.
The euro faces initial resistance near $1.3350, the 5-day moving average. Higher up, it faces resistance near $1.3414, the conversion line on the daily Ichimoku chart, a popular technical analysis tool. It has fallen some 7 percent - from a high of $1.4248 on October 27 to a trough near $1.3213 on November 25 - as the debt crisis spread through Europe.
Selling pressure on the euro strengthened last week in the wake of a weak bond auction in Germany, the eurozone's safest haven. Italy's short-term debt sale on Friday was also poorly received, sending Italian two-year yields to a euro-era high above 8 percent on Friday.
The bounce in the euro saw the dollar index fall 0.6 percent to 79.231, retreating from a two-month peak of 79.702 set Friday. Against the yen, the dollar dipped 0.2 percent to 77.63. Commodity currencies followed the euro higher, with the Australian dollar surging 1.4 percent to $0.9853, having climbed to as high as $0.9888 earlier on Monday. Eurozone finance ministers will meet on Tuesday where detailed operational rules for the eurozone's bailout fund are ready for approval, documents obtained by Reuters showed.