The euro rose a second day against the dollar on Tuesday, retreating from a recent 16-month low as risk appetite improved ahead of a European Central Bank policy meeting and crucial debt auctions from two of the region's larger economies. With euro net short positions at their largest ever, according to recent data, the euro was widely seen as open to bouts of short covering.
The single currency could come under renewed pressure with bond auctions on Thursday and Friday from Spain and Italy, two countries at the centre of the eurozone crisis. In early afternoon New York trade the euro gained 0.2 percent to $1.2784 after hitting a high of $1.2818 overnight. The euro has support just below $1.2600, a 76.4 percent retracement of its rally from June 2010 to May 2011 and its trough on August 24, 2010. The euro rose 0.1 percent against the yen to 98.20, not far from an 11-year trough of 97.28 yen hit during Monday's Japanese public holiday. The dollar was flat at 76.84 yen.