The euro eased on Monday after making significant gains, with many investors wary of buying the currency on caution about how effective action pledged by European policymakers to resolve the euro zone crisis would be. The euro earlier hit a one-month high against the dollar, adding to Friday's gains on investor optimism the European Central Bank would step in and buy bonds to reduce high Spanish and Italian borrowing costs in coming months.
But analysts said uncertainties remained over the ECB's plan and many saw more pain for the euro zone before a resolution to the crisis was reached. This meant some investors were inclined to use the euro's bounce to put on fresh bets the currency would weaken.
"There hasn't been anything that has improved the situation in Europe ... we haven't had any concrete improvement in the situation in the euro zone," said Niels Christensen, currency strategist at Nordea in Copenhagen.
The euro was down 0.3 percent at $1.2355, below a peak of $1.2444 hit in Asian trade, its strongest since July 5. Near term resistance was seen at around $1.2478, the 61.8 percent retracement of its drop from a mid-June peak to a two-year low of $1.2042 struck in late July. ECB President Mario Draghi said last week the bank would act only in co-operation with the euro zone bailout funds, and would require countries to ask for help first. Spanish Prime Minister Mariano Rajoy has signalled he may seek a full-blown aid package but is still undecided.
The euro's losses lifted the dollar against a basket of currencies. The dollar index was up 0.2 percent at 82.48. The dollar eased 0.2 percent to 78.30 yen but held above a two-month low hit last week. The euro was down 0.5 percent at 96.70 yen, having earlier risen to 97.80, its strongest since mid-July.
The euro has seen choppy trading since the ECB's policy meeting last Thursday. While some are relieved the central bank is prepared to act by buying bonds in the secondary market and expanding its balance sheet, many are not convinced this alone will be sufficient to trigger a sustained euro rally.
However, analysts at Morgan Stanley recommend buying the euro at 96.70 yen, with a target of 105.00 yen and a stop at 95.20. "The ball is now in the politicians' court, and we believe it is only a matter of time before they choose, or are forced by markets, to ask for official aid, opening the door for ECB purchases and a tightening of peripheral spreads," they said in a note to clients.
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