The euro rose against the dollar for the first time in four days on Monday as investors pared bearish bets, but doubts about the ability of the European Central Bank to rein in the region's debt crisis should keep the currency under pressure. Trade was thin and the euro remained below a one-month high hit last week. The euro rallied earlier this month after ECB President Mario Draghi pledged to do everything necessary to preserve the euro, which raised expectations the bank would buy Spanish and Italian bonds to lower borrowing costs for the two debt-plagued countries.
The single currency sold off in recent days due to the ECB's vagueness and disagreement among euro zone politicians, but investors decided the time was ripe to cover bets that the currency would fall. "The euro is well below the highs of last week and today we are seeing some short covering, but the move today is generally uninspired in a lacklustre session," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.
Many analysts expect the euro to tread water until September 12, when the German constitutional court is to deliver its verdict on the euro zone rescue fund and the fiscal pact for budget discipline. "I think we have a kind of weird equilibrium. We don't really know what the ECB is going to do," said Jens Nordvig, global head of FX strategy at Nomura Securities in New York.
"We don't know whether Spain is going to apply for help but we do know that Spain can apply for help if they need to and ECB will buy some bonds if an application has been made. So it does take away the most extreme tail risk and that's why we're trading in a more stable fashion," he said. A rich seam of US economic data due this week will help influence investors' take on the market, with the prospect of Draghi's promise pit against the possibility of more monetary stimulus from the US Federal Reserve.
If there is disappointment on Tuesday's release of July retail sales, currently forecast to rise 0.3 percent versus a drop of 0.5 percent in June, the US dollar would likely come under pressure. Weaker data adds to the argument for the Fed to launch a third round of quantitative easing in hopes of boosting economic activity. On Monday, the currency moves were exaggerated by lower volumes with much of the northern hemisphere on summer holidays.
The euro was last up 0.36 percent at $1.2332, rising past reported stop-loss orders at $1.2310 and $1.2330 to hit a session high of $1.2373 on Reuters data. Last week the euro hit a one-month high of $1.2443. Belgian central bank governor Luc Coene said in a newspaper interview that the ECB should ensure any help it gives to indebted countries comes with strict conditions.
And German magazine Der Spiegel on Sunday quoted Finnish Prime Minister Jyrki Katainen as saying Finland remained opposed to ECB bond-buying. "There is no coherent message between politicians and policymakers," said Jeremy Stretch, head of currency strategy at CIBC, adding that the euro's failure to break above $1.2450 would leave traders inclined to sell it on rallies.
The risk of politicians disagreeing on ECB action was likely to see traders selling the euro, he said. Euro zone second-quarter economic output data to be released on Tuesday is expected to show a contraction and is likely to put pressure on the ECB to cut interest rates, another factor that may weigh on the euro. The safe-haven Japanese yen showed little reaction to weaker-than-expected economic growth in Japan in the April-June period.
Analysts said the sluggish economic activity raised expectations that the Bank of Japan and the government were ready to provide additional stimulus, a move that could push the yen lower in the near term. The US dollar was up 0.1 percent at 78.34 yen, holding above a two-month low of 77.90 yen hit in early August, while the euro rose 0.45 percent to 96.63 yen, according to Reuters data.
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