The euro rose against the dollar on Tuesday, helped by persistent talk Spain may soon ask for a bailout and tentative signs of improving confidence in the German economy. Solid US retail sales and company results that eased global economic concerns also boosted demand for perceived riskier currencies, and helped the dollar climb to a one-month high against the safe haven yen.
A German ZEW survey showed analyst and investor sentiment rose for the second month in a row in October, although it remained in negative territory. The survey helped lift the euro to a session high, although the single currency remained well within its recent tight range roughly between $1.3070 and $1.28.
"There is a feeling of stalemate in the sense that the market is waiting for Spain to ask for a bailout ... There is a good chance that the euro could stay rangebound for a while," said Jane Foley, senior currency strategist at Rabobank. The euro rose 0.5 percent on the day to $1.3011, its highest level in a week, though traders said it may struggle to make a sustained break above $1.30 given reported demand to sell it around that level. A break above $1.3072 would target the mid-September high of $1.31729.
The euro also rose 0.8 percent to 102.685 yen. A Spanish aid request would prompt the European Central Bank to start buying Spanish bonds to bring down its borrowing costs. Analysts and traders say this would buoy the euro, though uncertainty remains over when Spain will make a move.
Although hopes that Spain could ask for financial aid at a European Union summit later this week have dimmed, euro zone officials said it may do so next month. The request would probably be dealt with alongside a revised loan programme for Greece and a bailout for Cyprus.
"I am still bullish on euro/dollar, the next stage will be Spain to ask for the bailout and that will boost the euro," said Daragh Maher, currency strategist at HSBC. He forecast the euro to rise to $1.35 by year-end. Uncertainty over Greece's discussions with its international lenders may limit gains for the euro, however. Speculation of more easing from the Bank of Japan also weighed on the Japanese currency.
"There seems to be pressure piling on the Bank of Japan to take action later this month. People are expecting more stimulus from the BoJ," said Katsunori Kitakura, associate general manager of market making at Sumitomo Mitsui Trust Bank in Tokyo, referring to the bank's policy meeting on October 30. The rise in US retail sales in September followed solid sales in August and pointed to resilient US domestic demand despite worries about slowing global growth. Although many traders expect the dollar's 77-79 yen trading range to persist, a substantial break above its Ichimoku cloud top, which now lies at 78.90, could be seen as one of the strongest bullish signs for the pair in many months.