The euro rose sharply as bears were forced to abandon their bets on Tuesday while the dollar came under broad selling pressure, hitting a three-week low against the yen and a seven-week low against the Australian dollar. The euro jumped after stop-loss orders were triggered at key chart points around $1.32. It rose to $1.3250, its best level in more than a week and extending its recovery from last week's three-week low of $1.3055.
Euro bears had been frustrated by the currency's firm support for more than a week at its 200-day moving average just below $1.31 and were giving up their positions for now. Many in the market have been betting on more weakness in the euro due to persistent worries that some eurozone countries such as Spain and Portugal may need rescue programmes to finance their debt, tracking a path trodden by Greece and Ireland.
"It's a flow-driven market so it's hard to tell how long this rise in the euro will continue," said a trader at a European bank, noting that a speculative player appears to have tried to take advantage of thin trade to push up the euro. The euro could target $1.3278, a 50 percent retracement of its fall earlier this month from $1.3500 to $1.3055, and then around $1.3330-35, which includes a 61.8 percent retracement of the same decline as well as the pair's peak in August.
"Essentially the euro is rising on short-covering. I think we'll need to watch the market a bit more to see how investors plan to allocate their money after Christmas and in the New Year," said Estuko Yamashita, chief economist at Sumitomo Mitsui Banking Corp. Market holidays in some Commonwealth countries including Australia and the United Kingdom have made for thin volumes and erratic trade.
Sentiment towards the euro remains fragile and many traders think it could retest the November 30 low of $1.2969. In one positive sign for the single currency, however, hedge funds' exposure has shrunk from an overstitched position last month to a more balanced level, said Todd Elmer, head of G10 strategy for ex-Japan Asia for Citi in Singapore.
But he added that this was just one of many preconditions that the euro must meet before returning to a recovery path. "Several weeks ago, we shifted to the view there will be downside to the euro in the short term. I'm not convinced if the timing is yet right to switch back to a more positive view on the euro," Elmer said.
The dollar was weaker against most other major currencies, falling to a seven-week low against the Australian dollar. "US bond yields fell yesterday. I think that's marginally negative for the dollar," said a trader at a Japanese bank. US bond yields eased after a two-year note auction attracted buyers, although a heavy snow storm in the north-eastern United States made a holiday-thinned market even thinner and yields crept up slightly in Asia.
The dollar also dropped to a three-week low of 82.40 yen, down 0.5 percent on the day, pressured by offers from Japanese exporters, many of which will be away later this week for the year-end and New Year holidays. The dollar slipped below key support at its 55-day moving average around 82.62 yen and barely clung to support around 82.40 yen, the bottom of a daily ichimoku cloud.
The bottom of the cloud is expected to gradually rise later in the week, rendering it thinner towards early January and pointing to a higher risk of the dollar falling below it. That would be considered a major bearish signal. The Aussie rose as high as $1.0090, its highest since mid-November and not far from a 28-year high of $1.0182 hit in early November.
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