The euro rose to a one-week high against the dollar on Thursday, helped by Italian government bonds holding their ground despite tepid demand at bond auctions, but unresolved worries about eurozone sovereign debtors are likely to limit gains.
Italy's 3-year borrowing costs rose more than a full percentage point at one auction, reflecting diminishing appetite to lend to weak economies with big debts.
The other bonds on offer were better bid, though, and Italy, the currency bloc's third largest economy, raised a total amount close to its maximum target of 5 billion euros.
The results matched relatively modest market expectations, doing little to ease concerns that both Italy and Spain will struggle to maintain fiscal discipline and grow their economies at the same time. However, markets have been encouraged after ECB Executive Board member Benoit Coeure sought to calm nerves on Wednesday, saying the ECB still has its bond-buying programme as an option to ease funding pressures for indebted countries.
The euro rose 0.5 percent on the day to a high of $1.3177. Traders said it extended gains after stop loss buy orders were triggered on the break of $1.3155-60, forcing players to cut short positions in the common currency. "The market is quietly putting the mini-crisis in the rear view mirror ... People are looking at putting risk back on in higher-yielding currencies," said Kit Juckes, currency strategist at Societe Generale.
The euro's falls pushed the dollar index, which measures its performance against a basket of major currencies, to a one-week low of 79.412.
Riskier assets also gained a boost as the higher-yielding Australian dollar jumped more than 1 percent to a high of US $1.0416 after unexpectedly strong Australian jobs data.
However, analysts said the euro's rise was partly the result of volumes remaining thin just after the Easter holiday and they still expected it to drop as concerns remain that the crisis could spread to much bigger economies like Spain or Italy.
"The response to the Italian bond auction and the performance of Spanish banks is an indication that problems for the euro are piling up," said Stuart Frost, head of Absolute Returns and Currency at RWC Capital, a fund manager. "We are short euro against the dollar and expect it to fall below the $1.30 level towards $1.26 in the near term."
The dollar was up 0.1 percent against the yen at 80.94 yen , up from a six-week low at 80.57 yen struck earlier in the week. But most traders said if US Treasury yields dip, the dollar could come under pressure.