The euro rose against the dollar on Monday after clawing back above its 200-day moving average, though sentiment on the single currency remained bearish amid worries about Portuguese and Spanish debt. Trading ranks were extremely thin. London was closed on Monday and Tuesday for holidays and a blizzard in New York limited activity, ensuring only minor price fluctuations.
The Australian currency earlier fell as low as $0.9987 after China's interest rate hike on Saturday, though it had climbed back to trade slightly higher on the day. While fears that a eurozone debt crisis could spread have pushed the euro below the 200-day moving average - $1.3087, according to Reuters data - in five of the last six sessions, it has rebounded swiftly each time. A drop below is usually indicative of more losses.
"With no economic news, we're focusing on these technical factors, and that push above the 200-day average has been a catalyst for the euro," said Omer Esiner, strategist at Commonwealth Foreign Exchange in Washington. "And with London off and the blizzard in New York, things are very subdued."
The euro last traded at $1.3156, up 0.3 percent on the session. It hit a three-week low of $1.3055 on trading platform EBS last week and the currency's outlook is still clouded by Spain and Portugal, which investors fear may have trouble refinancing their debt in the new year.
Speculators also boosted their bets against the euro in the latest week, data from the Commodity Futures Trading Commission showed on Monday, suggesting sentiment remained bearish. The data also showed an increase in long positions in the safe-haven Swiss franc.
Softer economic data from some of the weaker eurozone economies will also likely have a bigger impact on the euro next year than in 2010, according to strategists at BNP Paribas. "So far, the market is betting on positive spillover being seen from core Europe (Germany) to the periphery. However, with China tightening monetary policy, German exports will no doubt be affected," they wrote to clients. "Going into year-end, we favour euro/dollar breaking lower from its recent trading range targeting the 1.2970" level.
Australia's economy has benefited from strong Chinese demand and markets fear Beijing's attempts to dampen inflation with higher interest rates could hurt domestic demand there. But traders said earlier losses in the Australian dollar had more to do with the timing of the hike than the move itself.
"There was a knee-jerk sell-off in the Aussie, but investors knew this China move was coming eventually," said Geoffrey Yu, currency strategist at UBS. "Providing Chinese data holds up in 2011, the Aussie should stay supported." Danske Bank analysts said they expect three more Chinese rate hikes in 2011, with all likely coming in the first half. Against the yen, the dollar was down 0.1 percent at 82.81, near the lower end of its recent 82.50-to-84.50 range.
A rally in US bond yields earlier this month prompted many traders to bet on a rise in the dollar, but as the dollar was unable to extend gains, traders have been cutting long positions, analysts said. A correlation between the exchange rate and US yields started to weaken this month, with the dollar shedding 1 yen last week even as the two-year Treasury yield rose by 5 basis points. Traders, however, blamed illiquid, year-end conditions. UBS said gross trading flows involving the yen were less than 30 percent of typical weekly volume last week, adding: "what little we did see was heavily biased toward buyers."