TOKYO: The euro retreated from two-week highs against the dollar on Monday, pausing after its best weekly performance since February and drawing limited support from the weekend decision to double the International Monetary Fund's warchest.
Worries about upcoming debt auctions in Italy and the Netherlands and concerns about a political backlash against austerity measures could keep the single currency in check, traders said.
The Australian dollar slid after local producer price data cemented expectations of a rate cut by the Reserve Bank of Australia next week while sterling clung to its newfound market-darling status in the wake of upbeat UK retail sales data.
"The increase in the IMF is just a safety net. That alone is not enough to boost risk assets," said Koji Fukaya, chief currency strategist at Credit Suisse in Tokyo.
The single currency stood at $1.3189, down from Friday's peak of $1.3225 after a near 1 percent rally last week, its best since late February.
Advanced and emerging countries agreed to double the firepower of the IMF to help contain Europe's debt crisis.
But the United States did not contribute to the increase and market players said it not enough by itself to wipe out investor worries over whether indebted euro zone countries could redduce debt yields to sustainable levels.
The euro also relinquished some of last week's gains as markets digested the implications of France's presidential race, which saw President Nicolas Sarkozy come second to challenger Francois Hollande.
Some market players think Hollande, tipped to win the second round of the vote on May 6, may be less keen than Sarkozy on a German-led drive for austerity measures and could weaken the policy unity between the euro zone's two biggest economies.
In addition, the Netherlands, another euro zone core member, was set to face new elections after crucial talks on budget cuts collapsed over the weekend.
That saw the yield spread on the triple-A rated Dutch bonds over German paper rise to its highest in many years while the Italian debt yield spread is also rising to three-month highs.
Both the Netherlands and Italy will hold a bond auction on Tuesday, making them near-term focus for the euro.
Thus traders see little conviction for the euro to break out of its prevailing range of roughly $1.3000/$1.3300, with the late March/early April highs around $1.3375/85 providing formidable resistance.
BOJ UNDER PRESSURE
The pullback in the euro saw the dollar index rise to 79.252, up from a near three-week trough of 79.114 set Friday.
Against the yen, the dollar traded at 81.29, down 0.3 percent since late last week.
Although the Bank of Japan is under political pressure to ease again at this week's policy meeting, some see a chance of a brief yen rebound.
"In the long run, the yen will weaken because of the BoJ's entrenched easing bias. But in the very short-term, there could be some adjustment (to the yen's recent fall)," said Koji Fukaya, currency strategist at Credit Suisse.
The Federal Reserve will also hold its policy meeting this week, and as usual, markets will be on the look-out for any hints on more bond-buying from the central bank.
In contrast, unexpectedly strong UK retail sales figures on Friday no doubt came as a relief for Bank of England policymakers as they try to boost fragile growth at a time of sticky inflation, deep austerity measures and weak wage rises. Sterling fetched $1.6132, having hit a 5-1/2 month high of $1.6152. The euro bought 81.81 pence, not far off a 20-month trough of 81.59 set last week.
The Australian dollar dropped 0.4 percent after a benign producer price reading all but sealed expectations for a quarter-point rate cut at the Reserve Bank of Australia's (RBA) May 1 meeting.
The Aussie fell to $1.0340, well within last week's range of roughly $1.0300/$1.0410.