The euro rose against the dollar on Thursday, encouraged by solid demand at a Spanish debt auction, although gains were expected to be limited ahead of next week's summit of European Union leaders. Spain sold 3.75 billion euros of three bonds at the top of the targeted range, sparking relief among investors, although its cost of borrowing was the highest in 14 years and at levels seen as unsustainable for public finances.
France also found demand for its sale of 4.35 billion euros of debt in several maturities. The euro was up 0.35 percent at $1.3485, nearing Wednesday's one-week high of $1.3533, hit after central banks of the United States, eurozone, Canada, Britain, Japan and Switzerland cut the cost of dollar loans to the banking system. The euro also rose to a two-week high against the yen, but analysts were not convinced the common currency had much scope for further rallies. Although investors cheered Wednesday's joint central bank action they are worried that the eurozone debt crisis remains unresolved, with little time for politicians to find a solution.
A break above $1.3533 could see the euro rise towards its November 18 high of $1.3614. If it fails to retest Wednesday's high, however, the rally may peter out, while traders said the currency may be influenced by a reportedly large options expiry at $1.3500 later in the day. "The auction went well, adding support to the euro and adding to yesterday's short-covering rally," said Stephen Gallo, head of market analysis at Schneider Foreign Exchange.
The euro has had some reprieve this week as investors have unwound hefty short positions in the euro, helped by signs that Germany and France are pushing for more rapid fiscal integration among eurozone countries. Currency speculators increased their net short position in the euro to 85,068 contracts in the week ended November 22, the biggest such net short position since June 2010 and pointing to the potential for some short-covering in the currency.
"There are such huge short euro/dollar positions that if the markets are able to penetrate resistance levels then the euro might succeed in breaking higher," said Jan Bylov, chief currency analyst at Nordea in Copenhagen. "Next week we will have the ECB staff forecasts and we will surely get a substantial downgrade to growth and inflation forecasts," said Jeremy Stretch, head of currency strategy at CIBC World Markets. The Australian dollar was down 0.4 percent on the day at $1.0237, having jumped about 2.7 percent on Wednesday to a high of $1.0335. The US dollar index was down 0.25 percent at 78.179, though off a low of 77.923 hit on Wednesday.