The euro held steady as peripheral bond yields eased on Monday and led some investors to pare bearish bets against the common currency, while concerns over Spain's ailing banking sector and global growth supported the greenback and the yen. Grim US jobs data on Friday suggested the turmoil in the euro zone, which pulled the single currency down by about 6 percent last month, is taking its toll on the world's largest economy, stoking fears of a world-wide slowdown.
The safe-haven dollar and yen usually gain in times of financial stress and economic uncertainty. The yen has outperformed the dollar as expectations of more quantitative easing by the Federal Reserve have grown, underpinning speculation that Japanese authorities could intervene soon.
More insight on potential monetary easing may come from Wednesday's European Central Bank meeting, with markets positioning for an outside chance of a rate cut. Factory prices held steady in the euro zone in April, giving the ECB some room to cut rates. The euro was flat $1.2440, edging up from $1.2288, its lowest since July 2010, hit on Friday. Traders cited large bids at $1.2370-80, while offers from funds to sell were layered above $1.2450. Trade was thin with London markets closed.
The euro was 0.2 percent higher at 97.20 yen staying above Friday's 11-1/2-year low of 95.59 yen. "While expectations of more QE by the Fed may help the euro, with no quick decision about Spain in sight, the pressure on it will remain," said Beat Siegenthaler, currency analyst at UBS in Zurich.
The euro's sell-off intensified last week after Spain's borrowing costs spiked on worries it may need to issue more bonds to bolster its ailing banks, putting more stress on markets already concerned that Greece may exit the eurozone. Spanish and Italian bond yields eased on Monday, but with no credible and long-lasting policy response expected, borrowing costs are likely to stay elevated.
Commerzbank analyst Ulrich Leuchtmann said policymakers will have to react fast as the crisis reaches a tipping point. "In the end the politicians and/or the ECB will react, taking some pressure off the euro," Leuchtmann wrote. Commerzbank revised down its euro/dollar forecast, to $1.21 at the end of June at $1.21 from $1.32 earlier. Market players saw few reasons to buy the single currency, though there could be bouts of short-covering. Short positions in the euro surged to the highest on record, the Commodity Futures Trading Commission said.
Bets in favour of the dollar rose to their highest since at least mid-2008. The dollar index was slightly lower at 82.765, having hit 83.542 on Friday, its highest since late August 2010. The dollar inched up 0.2 percent to 78.15 yen, off Friday's trough of 77.65, its lowest since mid-February. The currency pair has been volatile on fears of yen-selling intervention by the Japanese authorities, a factor which will keep investors edgy. Expectations of more easing by the Bank of England also kept a lid on the British pound. Sterling was 0.1 percent higher at $1.5376, with some investors looking to sell into a bounce before a BoE policy decision on Thursday.
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