The euro rallied on Wednesday, snapping a three-day decline, on speculation the European Central Bank may take bold steps to ease the region's debt crisis at a meeting on Thursday. The eurozone single currency remained vulnerable, however, given persistent fears about Europe's fiscal problems although an apparent US pledge on further International Monetary Fund support pushed the euro to session highs at $1.3183 on electronic trading platform EBS.
A US Treasury Department spokesman said on Wednesday, however, that the United States is not discussing an extra commitment of funds for a European stabilisation fund right now. The euro traded in a two-cent range ahead of Thursday's meeting where the ECB is expected to keep interest rates unchanged and possibly announce an extension of crisis support measures beyond their scheduled expiration in mid-January.
Some analysts also expect the ECB to keep its three-month liquidity operations unlimited to help banks struggling for cash. Still, some market participants think the ECB could disappoint the market given the well-publicised conflict within the bank about buying bonds. That could prompt a resumption of the euro's sell-off in fairly short order, analysts said.
In late afternoon New York trading, the euro was up 1.2 percent at $1.3133, pulling away from Tuesday's 2-1/2-month low of $1.2969 but off the day's highs at $1.3183. The euro/dollar moved back above its 200-day simple moving average at the peak and at current prices would close above that measure for the first time since Friday.
A slight narrowing of yield premiums of government debt in Portugal, Spain, and Italy over safe-haven German bonds also supported the euro, as did a rise in European stocks and a decline in the costs of periphery credit default swaps. Relief that the Portuguese auction went well helped euro bulls counter offers at the $1.3090-$1.3100 area. Depending on what the ECB announces on Thursday, traders are still targeting $1.2794, a level representing the 61.8 percent retracement of the June to November rally. A breach of that should bring the August lows around $1.2600 in sight.
Investors also cautioned on reading too much into news the United States would be ready to support an extension of the European Financial Stability Facility via an extra commitment of money from the IMF. 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.