The euro rose to a near two-week high against the US dollar on Monday, buoyed by appetite for risk on optimism that Greece will receive more funding and signs of progress on resolving a looming US fiscal crisis. The common currency shared by the 17 euro zone countries, however, is still down 1.2 percent so far in November and analysts said it should struggle to retain gains even if concerns about Greece abate.
Eurozone finance ministers will give a tentative go-ahead for the disbursement of 44 billion euros in emergency loans to Greece on Tuesday, but the money will only be paid on December 5 if the country meets all remaining conditions. While the promise of additional funds for Greece removes an important psychological obstacle, the country's economic influence in the euro zone is relatively minor compared with that of debt-burdened Italy and Spain.
"For the euro/dollar to see an extended run ... a serious improvement in risk appetite is needed, with a Spanish bailout or an exceptionally quick compromise to the US fiscal slope necessary as the proper catalyst," said Christopher Vecchio, currency analyst at DailyFX in New York. The euro was last up 0.5 percent at $1.2804, having hit a high of $1.2819, its highest since November 7.
Another negative for the euro is the fact that the euro zone's economy remains mired in a recession while the US economy has been steadily improving, as made evident by the latest data on the housing market. Home re-sales unexpectedly rose in October while home-builder sentiment rose to its highest in more than six years. Analysts at Morgan Stanley recommended buying the euro at $1.2730, with a target of $1.33 and a stop at $1.2650.
Risk appetite improved, with world stock markets recovering some of their sharp losses last week, fuelled by comments from US lawmakers who indicated that compromises are possible in negotiations to avert $600 billion in tax increases and spending cuts due to start kicking in January. Many believe this "fiscal cliff" threatens to send the US economy back into recession, but the dollar would benefit in this scenario due to risk aversion. The dollar should weaken against the Canadian dollar and British pound into year-end, according to Camilla Sutton, chief currency strategist at Scotiabank in Toronto.
"The focus post-US election has been on the fiscal cliff, which we recognise as an important risk; however we believe that markets have moved too far into tunnel vision and are neglecting other important dollar drivers," she said. Meanwhile, investors have been selling the yen after elections were called for December 16 and the leader of the opposition Liberal Democratic Party called on the BoJ to print "unlimited yen" and set rates at zero or below.
The yen slipped from its highs into negative territory during late New York trade against the greenback. Caution prevailed ahead of Tuesday's BoJ policy meeting, with most analysts expecting no new monetary easing. "The BoJ is meeting tonight and we don't expect additional easing steps. But I think markets are looking ahead to how the BoJ will react to a new government with an extremely dovish stance," said Eric Viloria, chief currency strategist at Forex.com. The dollar last traded up 0.14 percent to 81.38 yen, according to data.