The euro rose today, heading for its first weekly gain against the US dollar in six weeks, as investors who had bet the currency would fall further bought it to prevent losses in case of currency intervention.
Investors were jittery about holding significant positions in the euro and other currencies given some market-moving announcements have been made on weekends this month.
The Australian dollar, down 6.6 per cent on the week against the US dollar, jumped on speculation Australia's central bank may intervene to support the currency. A high-yielding currency seen as a measure of global economic risk, the Aussie was set to suffer its biggest weekly drop since October 2008.
Investors were watching a task force of European finance ministers meeting in Brussels today. So far ministers look set to support a proposal for tougher sanctions against EU rule breakers.
"These are still relatively illiquid market conditions with real money pushed to the sidelines," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York. "The market is controlled by speculators and they can push it around a fair
bit."
Worries about the economic impact of the euro zone debt crisis drove the single currency to a four-year low versus the US dollar this week.
The stampede out of the euro pushed net short positions in the single currency to a record high last week, with the current week's speculative positions on the euro to be released late today.
The euro has fallen roughly 5.5 per cent against the dollar this month. Its steep decline has cranked up speculation European officials may be concerned about its level.
It got a boost today when European Central Bank president Jean-Claude Trichet said the euro was not in danger and was a credible currency.
Eurogroup chairman Jean-Claude Juncker said yesterday he did not see the need to take immediate action on the euro's decline.
Today, the euro climbed as high as $1.2673 on electronic trading platform EBS in early trade. It last traded at $1.2565, up 0.8 per cent on Reuters data.
It tumbled as low as $1.2143 earlier this week after Germany banned naked short selling in some securities, fuelling speculation about other possible market regulations.
The euro is poised to end the week roughly 1.7 per cent higher against the dollar, following five weeks of losses.
Analysts said heightened fears about risk had prompted a rush to square positions -- long and short - in currencies which are high-risk or less liquid.
"Risk aversion has risen so rapidly that in order to protect their books, investors are just closing positions and repatriating capital," said Carl Hammer, currency strategist at SEB in Stockholm, adding: "It's a snowball effect."
This flight to safety soaked up liquidity, resulting in choppy trade and aggravated currency movements.
Against the Swiss franc, the euro traded 0.5 per cent higher at 1.4432, having recovered sharply from a slide to an all-time low of 1.3995 francs earlier in the week.
The Australian dollar rose 1.7 per cent against the US dollar to $0.8267, pulling back from a low which was its weakest since July 2009. The Australian dollar was up 3.5 per cent against the yen after touching its lowest since July, 2009 earlier in the session, though still down around 9 per cent for the week.