The euro edged up today, pausing from its recent sell-off and tracking slight gains in global stocks, but its advance was limited by concerns about the impact of euro zone debt problems on the world economy.
An early rise in European shares helped to quell some risk aversion, keeping higher-risk currencies near the day's highs versus the safe-haven dollar and the yen.
With little in the way of economic data or events to drive the market, investors bought back the euro after it hit a four-year low versus the dollar yesterday.
Euro zone ministers yesterday finalised arrangements for a Special Purpose Vehicle to raise up to €440 billion to lend to countries facing debt servicing problems.
Some analysts said the widely expected move was also helping to stop the euro's sell-off for the moment, while others in the market said the euro may be hemmed by options barriers due to expire later in the day.
By 7.43am, the euro traded 0.4 per cent higher on the day at $1.1960, having edged up to a session high of $1.1982 in earlier trade. Against the yen the euro rose 0.9 per cent to 109.80 yen.
Yesterday, the single currency fell as low as $1.1876 on electronic trading platform EBS, its weakest since March 2006, while plumbing 108.06 yen, its lowest in more than eight years.
Slight gains in Asian shares helped to support the euro, while European shares bobbed in and out of positive territory in early trade. The euro's stabilisation following hefty losses late last week, when a weaker-than-expected reading of US jobs data and a warning by Hungary that it may face Greece-style debt problems had triggered risk aversion.
Market participants said a slew of options in the $1.19-1.20 region which were due to expire late in the day may confine the single currency to narrow ranges in European trade.
Currencies considered to be higher-risk gained today, pushing the Australian dollar up 1 per cent versus the U.S. dollar, while the New Zealand currency rose 0.4 per cent.
This helped to push the dollar down a touch versus a currency basket, while the yen stumbled across the board.
Along with the SPV agreement, some in the market were also heartened by the German government's agreement of an austerity package while Hungary promised cuts to meet budget targets.
Still, financial markets continued to fret over the region's banking systems, and many investors expect the euro to suffer more losses in the mid-to longer term.
Market participants are expected to focus on developments in European peripherals with particular focus on Hungary, to better determine whether debt problems facing some euro zone countries will spread beyond the 16-nation region.
"The macro picture remains indicative for the euro to remain in a downtrend, especially versus the dollar," UBS analysts said in a note.
"The outlook for weakening global growth momentum coupled with structural problems in Europe remaining in tact does not bode well for risk."
Reuters