NEW YORK: The euro rallied against the dollar o n T hursday in choppy trading after two days of losses, boosted by institutional buying to adjust short positions following generally solid Spanish bond auctions this week.
News that the International Monetary Fund has secured commitments of about $320 billion in funding to help shield member economies from the debt crisis in Europe also supported the euro, some analysts said.
However, there is still a lot of skepticism in the market about the liquidity in the euro zone financial system and the sustainability of the region's debt. On the other hand, some institutional investors are less pessimistic and are willing to get out of their short positions and stay neutral.
"There are a lot of people, mostly in the real money community, who are short euros, but who realize that these are stale positions," said Douglas Borthwick, managing director at Faros Trading in Stamford, Connecticut.
He cited the generally positive news overall in the euro zone -- the solid Spanish auctions this week, IMF commitments to help economies cope with the debt crisis and the fact that there has been no disorderly default by any indebted peripheral country.
"If you put all these things together, investors are a lot more comfortable," said Faros. "It's not that people are outright buying the euro to go long on it, but it's more looking like they're buying the euro to get out of their short positions."
In midday trading, the euro rose 0.1 percent to $1.3135, after hitting a session low of $1.3068. Against the yen, the euro climbed 0.5 percent to 107.14 yen.
Positioning indicators also suggested that market players were already very short of euros versus the dollar, which could limit short-term falls.
"The market is almost historically short of euros and long of dollars, which will make it difficult to push euro/dollar lower," said Arne Lohmann Rasmussen, head of currency research at Danske Bank in Copenhagen.
He said Dankse forecast the euro to be at $1.32 in three months and in six months, mainly due to market positioning.
Traders, however, said they were inclined to sell into any euro rallies, with the rise in Spanish and Italian yields undermining any optimism from the auction. Earlier, market talk of a French downgrade had also undermined sentiment toward the common currency.
"This is all emblematic of the fact that the market remains very nervous about the state of credit in the euro zone," said Boris Schlossberg, director of FX research at GFT Forex in Jersey City, New Jersey.
Spain's Treasury issued 2.5 billion euros in two- and 10-year bonds, at the top end of the targeted amount. Yields on the key 10-year bond were higher, however, reflecting fears that Spain may miss budget deficit targets and concerns about its banking sector.
The euro also modestly sold off after a report showed that US initial jobless claims were weaker than expected, which slightly dampened risk appetite. A lower-than-expected reading of business conditions in the US Mid-Atlantic region and a surprise fall in US existing home sales added to the weakness.
The euro held above strong chart support at $1.30. But an escalation of concerns about Spain's high level of debt, at a time when the economy is faltering, would put the euro back under pressure, potentially taking it toward the 2012 low of $1.2624.
Many in the market said the euro would head lower in the medium term given the risks that budget and debt problems in Spain will worsen and uncertainty over the outcome of the French presidential election, which polls suggest will result in a leadership change.
Traders cited talk of hedge funds betting the euro will fall to $1.25 soon after the French poll concludes early next month.
The safe-haven Japanese yen fell as equities gained and after Bank of Japan Governor Masaaki Shirakawa stressed the central bank's commitment to monetary easing.
The dollar rose 0.3 percent to 81.50 yen, triggering reported stop-loss buy orders around 81.60 yen, with traders citing flows related to the launch of a large investment trust by a Japanese investment bank.