The euro rose against the dollar and the yen on Wednesday as an ECB policymaker raised the possibility of more bond-buying, but the single currency traded within recent ranges as investors stayed cautious about the European debt crisis. Investors have recently pushed up Italian and Spanish yields on fears debt burdens in those nations could be unsustainable.
But the European Central Bank's Benoit Coeure said on Wednesday that the scale of market pressure on Spain is not justified given the reforms being undertaken by its government and that the ECB still has its bond-buying program as an option.
Coeure's comments helped the euro touch a near one-week high against the dollar, recovering ground lost in the previous session. The currency also advanced against the yen after closing at about a seven-week low in the previous session.
"We have seen over the past two months the (euro zone) situation move into calmer waters, but that doesn't mean the situation is over by any means," said Sean Incremona, an economist at 4Cast Ltd in New York.
Bond yields underscored the market's continued wariness: while Spanish 10-year yields fell on Wednesday, they remained near the key 6 percent level. In addition, Italy blamed a jump in its one-year borrowing costs on Wednesday on fears of contagion over Spain's budget problems.
Coeure's comments came one day after Spanish bond yields hit their highest levels this year, exacerbating worries about the global economy after last week's disappointing US jobs report and soft Chinese imports. "Today's price action comes after a couple of days of pessimism, but the ECB's comments helped reverse some of that," said Win Thin, global head of emerging market currency strategy at Brown Brothers Harriman in New York.
Greece on Wednesday called a snap election for next month, opening a campaign that may not produce a clear result and that could threaten implementation of the international bailout plan that saved the nation from bankruptcy.
The euro was last up 0.17 percent at $1.3102, trading largely within its range of the previous session. Traders said demand from hedge funds and sovereign names propped up the common currency after reportedly buying on dips.
On the upside, the euro should find resistance at $1.3160-70, which is around the 38.2 percent retracement of its March 27 to April 9 drop.
On the downside, support can be found between $1.2973, the February 16 low, though the euro has mostly been stuck between $1.30 and $1.35 since late January.
"I will use small gains (in the euro) to get better levels to sell ... If Spanish yields go back above 6 percent then it would favor a break-out of the range to the downside," said Jeremy Stretch, head of currency strategy at CIBC.
The options market suggests some easing in uncertainty about the euro's prospects, with three-month risk reversals in the euro/dollar still biased for euro puts, trading at -2.25 vols on Wednesday, but improving from -3.5 vols in mid-February.
The dollar gained 0.27 percent to 80.88 yen, up from a global session low of 80.57 yen, according to Reuters data, its lowest level since March 7.
The euro gained 0.43 percent to 105.97 yen, recovering from an earlier seven-week trough of 105.42 yen, according to Reuters data.
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