The euro rose against the dollar today, boosted by East European and Latin American demand, though traders said uncertainty about how authorities will handle the euro zone debt crisis could limit gains.
That China refrained - for now - from raising interest rates to quell inflation also helped the euro by stoking risk appetite and also boosted the price of oil and commodity-linked currencies such as the Australian dollar.
The euro rose 0.4 per cent to $1.3292, about a cent above its session low, but traders said it would probably remain in a tight range ahead of a European Union summit later this week that may yield a permanent fund to support troubled countries.
"It seems the market is comfortable with a euro just above $1.30, and for now, it would take very specific developments to push it out of its recent range - call it $1.3150 to $1.3450," said Matthew Strauss, a strategist at RBC Capital Markets.
A break of $1.3324, followed by $1.3401 would provide the momentum to test the top of that range, he said, though he warned that thin, pre-holiday trading conditions and a recent rise in US yields will make it tough for a trend to develop.
The US benchmark 10-year yield hit a six-month high overnight. With interest rates in developed countries at or near record lows, higher US yields make the dollar more attractive to global investors.
The EU's two-day summit begins on Thursday, and leaders are expected to agree to tweak the EU treaty, paving the way to create a European Stability Mechanism (ESM) from 2013, when a temporary mechanism expires.
It comes as fears that Portugal and possibly others could follow Greece and Ireland in seeking emergency bailouts. Such fears prompted speculators to more than double bets against the euro, according to weekly data on speculative currency positions issued on Friday.
While German opposition to the idea of a joint euro zone bond suggests that issue is off the agenda, speculation about a permanent fund was a hopeful sign for investors.
"The more they talk and try to come up with a solution, the more positive it is for the euro," said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey.
Mr Dolan said the euro's ability to hold well above $1.30 last week despite the rise in US bond yields and fear about the euro zone crisis was also a good sign for euro bulls.
Elsewhere, the dollar was down 0.3 per cent at 83.68 yen, while higher oil prices pushed it down against commodity-linked currencies in Canada
Traders said volume was light and likely to get lighter as the Christmas holidays approach. Until hard news comes from Europe, "speculative and leveraged money is still more inclined to be short of euros and they will stay this way through December and the first quarter of next year", said Stephen Gallo, head of market analysis at Schneider Foreign Exchange.
A Federal Reserve meeting tomorrow, while freighted with less drama than recent gatherings, will also be watched closely for any clues about the central bank's economic outlook or the progression of its $600 billion bond-buying scheme.
Reuters
