A sharp fall in Spanish short-term borrowing costs boosted the euro on Tuesday albeit in thin trade, with fresh signs that the German economy is holding up in the teeth of the eurozone debt storm also supportive. But sentiment was fragile and investors were still looking to sell into a bounce as efforts by policymakers to address the debt crisis fell short of expectations and European Central Bank chief Mario Draghi dashed hopes of any aggressive support.
The euro was up 0.5 percent at $1.3065, above an 11-month low of $1.2945 hit on trading platform EBS last week. It extended gains to hit a session high of $1.3089 after stops were triggered when Spain issued short term debt at sharply lower costs. The euro was already cheered after Munich-based Ifo think tank said its business climate index, based on a monthly survey of some 7,000 companies, rose to 107.2 in December from 106.6 in November, confounding expectations of a fall.
The currency was also garnering some support on expectations that banks will borrow a large amount of three-year funds from the ECB later this week and invest some of the money on buying peripheral debt and use them as collateral. Euro zone banks are expected to buy some 250 billion euros, according to a Reuters poll.
Italian 10-year government bond yields were last 17 basis points lower at 6.69 percent, narrowing the spread over Bunds to 477 bps. Equivalent Spanish paper fell 11 bps to 5.14 percent. "There has been some good news for the euro from the Spanish auction and the German Ifo but it was ripe for a correction with positions so short already," said Jane Foley, senior currency strategist at Rabobank.
Latest IMM data showed speculators increased their short euro position sharply in the week ended December 13 as faith in European leaders ability to solve the debt crisis waned. European leaders are still falling short of market expectations to come up with measures to contain the region's debt crisis two weeks after a key EU summit failed to produce a comprehensive solution.
European policymakers also failed on Monday to boost resources at the International Monetary Fund by an expected 200 billion euros. Instead they agreed to bolster lending by 150 billion euros ($195 billion), casting fresh doubts on whether the scheme would work to save larger economies like Italy.
"They have agreed to boosting resources by 150 billion euros which still raises questions about Italy and the threat of rating agencies looming," said Simon Derrick, head of currency strategy at Bank of New York Mellon. The common currency's 2011 lows of around $1.2860 were struck in early January and analysts say the failure to persuade countries to bolster lending to the IMF participate will be negative for the euro. The Australian dollar rose one percent on the day to US $1.0000, boosted by a slightly better tone for risk appetite and after the Reserve Bank of Australia's policy minutes were less dovish than anticipated.