The euro edged up in Asia on Monday after Italy's announcement of austerity measures prompted short-sellers to buy back the currency, though many market players see more twists and turns in the lead-up to a European Union summit this week. Italian Prime Minister Mario Monti on Sunday unveiled a 30 billion euro ($40 billion) package, raising taxes and increasing the pension age in a drive to shore up Italy's strained finances.
"Given large short positions in the euro, there will likely be some short covering if there's any progress in debate on the safety net for the debt crisis," said Makoto Noji, senior strategist at SMBC Nikko Securities. Showing just how pessimistic speculators have become on the euro, data from a US financial watchdog on Friday showed speculators on the Chicago futures exchange had their largest net short position in 18 months last week.
The euro, which gained 0.8 percent last week, climbed as high as $1.3441 early in Asia, before stabilising around $1.3404, up about 0.1 percent from $1.3391 late in New York last week. The currency stood about 1.4 percent above its seven-week low of $1.3213 hit late last month. Stop loss orders are seen around $1.3450 and then $1.3500. The dollar index eased 0.1 percent to 78.558.
Markets are hopeful the EU will have taken a step towards fiscal union by Friday, agreeing on a treaty change to anchor coercive budget discipline for the 17-nation currency area. But that outcome is far from certain. There will also be intense pressure on the European Central Bank to cut rates at its policy meeting on Thursday and offer fresh liquidity measures for banks, if not more sovereign bond buying.
"I'm sure this week will be volatile. There will be moments of disappointment and moments of optimism. In the end the euro is dependent on what European leaders do," said Katsunori Kitakura, chief dealer at Chuo Mitsui Trust Bank. Recent summits have hardly spurred subsequent performance and a lack of detail or action could produce a similar outcome this time, even if expectations have probably been somewhat watered down, analysts at Barclays Capital warned.
Traders are now looking to Monday's meeting of French President Nicolas Sarkozy and German Chancellor Angela Merkel to see whether they can overcome remaining differences in order to fine-tune proposals they want to present to EU leaders in Brussels on Thursday on the eve of the summit.
The Australian dollar failed to maintain earlier gains and stood flat at $1.0204 ahead of the Reserve Bank of Australia's (RBA) policy meeting on Tuesday, at which analysts see a good chance it will cut rates for the second month in a row. Risk sensitive commodity currencies drew some comfort from Friday's data showing the US unemployment rate fell to a 2-1/2 year low in November, though the improvement was partly due to people leaving the workforce.
The closely watched non-farm payrolls report extended a string of better-than-expected figures that suggested the world's biggest economy remained on course for recovery. "The US economy has been resilient to the market turmoil of recent months, but remains vulnerable to a deterioration in Europe and further slowing in emerging markets," said Julia Coronado, BNP Paribas North America chief economist, in a note to clients. "Uncertainty about whether a slowdown of pick up in growth comes next remains high." With the market focus on Europe, the yen took a back seat, moving little at 77.96 yen per dollar.