The euro rose on Wednesday as a three-day selling spree lost steam, but doubts about whether the eurozone can contain debt problems facing some states kept the single currency in range of a 2 1/2-month low versus the dollar. A slight narrowing of yield premiums of government debt in Portugal, Spain and Italy over safe-haven German bonds supported the euro, but market participants said the single currency remained vulnerable to more selling.
Investors awaited a European Central Bank policy meeting on Thursday at which some expect the central bank to keep its three-month liquidity operations unlimited to help banks struggling for cash, which analysts said also helped the euro. "The market's been caught short on euros. Periphery yield spreads have tightened somewhat, and the market's pricing in the possibility that the ECB won't be too aggressive tomorrow," said Geoffrey Yu, currency strategist at UBS.
ECB President Jean-Claude Trichet on Tuesday suggested the central bank may expand purchases of government bonds to help drive down rocketing yields. An auction of 12-month Portuguese Treasury bills went relatively smoothly, although Lisbon was required to pay a premium on its borrowing. The euro was up 1 percent at $1.3106, pulling away from Tuesday's 2-1/2-month low of $1.2969 although it stayed below its 200-day moving average at $1.3124. Analysts and traders said the euro's 9 percent fall from the November 4 high of $1.4281 to Tuesday's low left many feeling it was a good time to take profits on short euro positions.
The euro's drop below $1.3080 meant it had already retraced 50 percent of its rise from the June low of $1.1876 to the November high in less than four weeks. Traders said there was support above $1.2950, where options barriers were reported. The euro's rise lifted other currencies seen as higher risk. The Australian dollar rose 0.7 percent to $0.9645. The greenback slipped 0.4 percent versus a currency basket to 80.857, but stayed near a 2 1/2-month high hit on Tuesday as the currency, the most liquid and therefore considered safe, has benefited from the euro's problems. The safe-haven Swiss franc fell to 1.0066 francs per dollar, its weakest since late September.