LONDON: The euro dipped on Tuesday after comments by Spain's economy minister tempered expectations of radical action by European policymakers to contain the worsening debt crisis.
The single currency had recovered on talk policymakers were planning to boost the size of the regional bailout fund, halve Greece's debts and recapitalise banks, encouraging investors to take profit on short positions after the euro fell below $1.34 on Monday.
But it fell 0.35 percent against the dollar to $1.3492 after Spain's Elena Salgado said plans to extend the region's EFSF bailout fund almost sevenfold to 2 trillion euros were not on the table.
Analysts said doubts persisted over policymakers' ability to craft a plan quickly to deal with the crisis, and that the euro would stay vulnerable to any news or comments that dampened the mood of tentative optimism.
"Any indication that European politicians will take fundamental steps to contain the debt crisis is positive for the euro, but we have had so many disappointments and this is not something that can be fixed overnight," said Niels Christensen, currency strategist at Nordea in Copenhagen.
"A lot of investors are looking to reset new short euro positions around $1.36, maybe around current levels".
Growing expectations that the European Central Bank could cut interest rates were also expected to weigh on the euro. Some ECB officials said on Monday that cuts could not be ruled out.
The euro stayed above an eight-month low of $1.3360, though oscillators such as the relative strength index suggested the currency may be near oversold territory.
Resistance loomed at $1.3580, a 38.2 percent retracement of its Sept. 15-26 decline, while traders reported large offers above $1.3570.
But if stop loss orders were triggered above $1.3600 the euro could see a rally to $1.3648 and possibly $1.3716, the 50 percent and 61.8 percent retracements of the above decline, before a downtrend resumes.
"Markets are getting more confident around some action plan in Europe, which is positive, but on the other side, markets are also looking for more policy easing from the ECB, which is negative," said Greg Gibbs, currency strategist at RBS in Sydney.
"The combination of both will leave the euro caught in the middle somewhere."
ECB Executive Board member Lorenzo Bini Smaghi said in New York on Monday that the existing 440 billion euros in the bailout fund, known as the European Financial Stability Facility (ESFS), might be used as collateral to borrow from the European Central Bank, which would make more money available for crisis fighting.
Higher-risk growth-linked currencies rebounded after a recent sharp sell-off, helped by firmer equities, with the Aussie up 0.4 percent at $0.9885 and the Kiwi up 0.9 percent.
YEN STILL STRONG
The dollar traded at 76.37 yen, hovering close to record lows around 75.94 yen and keeping alive expectations that Japan could intervene again to stem its currency's gains. The yen has gained nearly 6 percent so far this year.
Early on Tuesday, Japan's government said it wants to bring forward steps to ease the pain some companies feel from a stronger yen and enact the measures before it completes an extra budget to fund reconstruction spending.
"The yen is at levels where you can expect the Bank of Japan to come in. They won't like dollar/yen below 76, so they will be very much on alert," Nordea's Christensen said.
The euro stood at 103.23 yen, having bounced from a fresh decade low of 101.90 yen hit on Monday, weathering some month-end selling from Japanese exporters.
This week the euro zone faces plenty of hurdles, including votes this week in Finland and Germany on the earlier EFSF structure. The Greek government votes Tuesday on new austerity measures needed to secure aid.
The dollar index edged down from 0.35 percent to 78.085, off an eight-month peak of 78.863.
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