Euro edges up in London

The euro edged up against the dollar on Wednesday as investors trimmed hefty bearish positions, but worries about debt turmoil in Spain and nerves ahead of elections in Greece kept the common currency under pressure. Concerns were growing that Spain's problems might ensnare Italy, whose borrowing costs are also at very high levels.
Even yields on safe-haven German bunds have climbed recently, which some see as evidence the rising cost of shoring up the eurozone's finances may be denting the creditworthiness of Europe's largest economy and paymaster. But some investors were cutting back on the market's very high short positions in the euro, particularly with the weekend's Greek elections looming, keeping the euro supported.
"The market is very short of euros so there is potential for profit-taking on those positions and for the euro to rise modestly, although our view is that those short positions will remain entrenched," said Lee Hardman, currency economist at BTMU. A strong performance by Greek parties opposed to the terms of the country's bailout would stoke fears the country could leave the euro. But a good showing by pro-bailout parties could give the euro a small lift, albeit probably a short-lived one, analysts said.
The euro was up 0.15 percent at $1.2531, well above its near 2-year low hit on June 1 at $1.2288 but staying below a three-week high reached on Monday at $1.2672. The common currency hit a high for the day at $1.2553 when it failed to clear near-term resistance at the 21-day moving average. A reported options expiry at $1.2500 later in the day could influence trade, traders said.
Analysts say that unless euro zone policymakers take steps towards a more cohesive fiscal union and put the region's banking system in order, sentiment towards the euro will remain negative. "There is a risk that the Spanish problems could spread to Italy and investors are mindful of that," said Jeremy Stretch, head of currency strategy at CIBC World Markets.
Traders said if Italian and Spanish bond yields continued to edge towards perceived unsustainable levels of around 7 percent, the euro could come under more pressure in the near term. Italy faces a test on Thursday, when it plans to offer up to 4.5 billion euros of fixed-rate bonds.