NEW YORK: The euro rose against the dollar for the first time in nine sessions on Thursday, bouncing from its recent 3-1/2-month low as stress in Spanish debt markets eased slightly and after Greece secured funds to repay its bondholders.
The tempering of the threat of a Greek insolvency and the country's possible exit from the euro also had the single currency rebounding from a mid-February low against the Japanese yen.
Greece averted an imminent funding crisis after the board of the European Financial Stability Facility agreed to release a scheduled payment. The allocation allows the country to meet near term bond redemptions, helping the euro stabilize after an eight day sell off.
"The EFSF agreement could be viewed as euro-positive, and data in the US and overseas was not negative, but today's euro gains are primarily due to consolidation more than anything else," said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York.
"The euro's bounce has been reasonably limited, so this is not a turnaround, and the whole political process in Greece is still playing out," he said. "A new range of $1.26-$1.30 in the euro/dollar is likely on its way to being formed."
Greece's future in the euro zone remains questionable, with another round of elections foreseen and doubts about whether the country will adhere to austerity measures needed to secure further emergency funding.
The euro last traded at $1.2954, up 0.2 percent after hitting its lowest since late January on Wednesday of $1.2910.
Traders said the next possible support for the euro was around $1.2819, the 76.4 percent Fibonacci retracement of its 2012 rally, with the year's low around $1.2624 then coming into play.
A drop in 10-year Spanish government bond yields also favored the euro. The country's government effectively took over Bankia, one of the country's biggest banks, in a bid to restore confidence in a sector laden with bad debts.
Options investors, however, are betting on a weak euro, with three-month risk reversals biased toward puts, trading at -2.65 vols, flat from Wednesday, but up from -2.275 vols a week earlier and -2.150 vols at the start of the month.
Greek Leftist leader Alexis Tsipras gave up his attempt to form a new government on Wednesday, putting Greek Socialist leader Evangelos Venizelos in a position to make a last-ditch attempt to form a government on Thursday.
With Athens at risk of running out of cash in June, a rerun of elections could be a make-or-break event for Greece.
"We're entering a new chapter of concern for the euro zone and it's not one that can be resolved in the near future," said Tom Levinson, currency strategist at ING, who expected sellers to stamp out any short-covering rallies in the common currency.
Against the yen, the euro was up 0.6 percent at 103.58 yen from the previous day's low of 102.73 yen, its lowest level since February 16.
With a drop in US claims for unemployment benefits, the dollar gained against the yen, while another report showed the US trade deficit widened in March. Together, the reports indicated the economy remains on a moderate growth path.
The US dollar was last up 0.3 percent at 79.92 yen.
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