The euro rose on Tuesday on bets the European Central Bank would take decisive action to tackle the debt crisis in coming weeks, although gains were seen limited in the absence of concrete details. Market players also trimmed long dollar positions after a media report flagged the possibility of a downgrade to the US credit rating.
That added to investor caution in the run-up to a meeting of central bankers at Jackson Hole, Wyoming, beginning on Friday. Any hints from Federal Reserve Chairman Ben Bernanke, who speaks on Friday, that policymakers are close to introducing more US monetary easing would be likely to weigh on the dollar. Traders said liquidity was thin and that the euro's gains were fuelled by a large US investment bank buying a one-month euro/dollar option with a strike price at $1.2675, suggesting the euro could rise to those levels in coming weeks.
The euro rose 0.4 percent to $1.2547, close to last week's peak of $1.2590. Traders said automated stop loss orders were triggered at $1.2530, adding to euro strength. "There's a very large euro call (option) that has been the catalyst for the rise but I think we will play the ranges this week," said Richard Wiltshire, chief FX broker at ETX Capital.
Wiltshire said the euro was likely to trade within a narrow range between $1.2450 and $1.26, just below resistance at the 100-day moving average. Analysts said the euro's recent rally since European Central Bank chief Mario Draghi said he would do whatever it took to preserve the euro, appeared to be waning with details of the ECB's scheme to buy peripheral euro zone debt still uncertain.
But the dollar has came under pressure against most major currencies, including the euro, since minutes last week of the US Federal Reserve's last policy meeting sparked expectations it may start a fresh round of stimulus next month. "The euro's inability to rise above $1.26 suggests there is a lot uncertainty going into the Jackson Hole symposium," said Adam Myers, senior currency strategist at Credit Agricole.
The dollar fell 0.1 percent to 78.63 yen. Investors usually buy the safe-haven yen during uncertainty about the global economy or heightened financial market stress. While the yen made fresh gains, the commodity-linked Australian dollar hit a fresh five-week low of $1.0345. Sharp drops in the price of iron ore, coal and other commodities largely exported to China are adding to worries, although Australian Treasurer Wayne Swan dismissed concerns the declines will weaken government revenues. The Aussie also hit a one-month low of 81.25 yen, and a seven-week low of A$1.2098 per euro.