The euro backed off a nine-week high today with sharp gains of the past two weeks on easing worries about euro zone debt inducing profit-taking, while more neutral market positioning may make its advance milder.
The euro held above key resistance around $1.3570 that it broke on Friday, a 50 per cent retracement of its decline from November to early this month, as data showed speculators have closed all their bets against the currency.
Speculators turned long on the euro for the first time in two months in the week ended January 18th while doubling their bets against the greenback, figures from the Commodity Futures Trading Commission showed on Friday.
"After speculators flip their positionings, they tend to build up more of their new positions for some time. So the euro still looks to be on a rising trend to me," said a trader at a Japanese bank.
The euro fetched $1.3610, having briefly hit a fresh two-month high of $1.3648 in early Australasian trade on Monday, slightly below $1.3620 late in New York on Friday.
The currency piercing resistance around $1.3570 brings into view $1.3740, a 61.8 per cent retracement of its decline from November to early this month.
The euro has rallied some 6 per cent in the past two weeks thanks to a mixture of demand from Asian central banks, easing worries over euro zone debt and increasing international support for the euro zone's rescue plan.
But as the commodities commission data shows, speculators no longer have short positions that need to be closed, so the euro's momentum is likely to slow, some market players said.
"As we can't expect more short-covering, the euro no longer has an engine for its rally," said a trader at a Japanese brokerage.
In the options market, one-month implied volatility on the euro/dollar fell to its lowest level in more than three months in another sign of rising expectations that any further rise in the euro will be slower rather than faster.
Thus the news that Ireland's junior coalition party withdrew from Prime Minister Brian Cowen's government on Sunday, hastening an election, was enough to trigger profit-taking.
Still, euro bears were wary of becoming too negative, having been badly burnt in the last couple of weeks.
"I don't think sovereign debt problems will go away but the thing is Europe does have a safety net already," said Minori Uchida, a senior analyst at Bank of Tokyo-Mitsubishi UFJ.
"And on the other hand it is not as if the US doesn't have fiscal problems. Its deficit is widening sharply on planned tax cuts and the finances of many of its states are strained. I suspect there will be a time later this year when the market will focus on US debt problems," he said.
The premium on 10-year credit default swaps on US sovereign debt hit a near two-year high last week and US municipal bonds have been under pressure for some time.
While the level of the credit spread on US sovereign debt is still low, its recent rise contrasted with a fall in credit spreads in Italy, Spain and Portugal in the past couple of weeks.
The euro drew additional help from tough talk on keeping inflation in check from European Central Bank chief Jean-Claude Trichet.
In an interview with the Wall Street Journal yesterday, Mr Trichet said core inflation was not a good gauge of future price pressures and that the central bank was ensuring higher energy prices do not seep into other prices.
In contrast, the Federal Reserve is more worried about reviving the job market and the Fed statement on Wednesday is likely to give only a sober assessment of the sluggish recovery.
This has helped drive euro zone benchmark German 2-year yields to one-year highs and pushed its spread to the equivalent US yield to the widest in about two years, making the euro more attractive against the dollar for some investors.
Against the yen, the single currency was at 112.50 yen, having hit a two-month high of 112.63 in choppy early trade and rising above its 200-day moving average for the first time in over a year.
Against the Swiss franc, the euro also held near Friday's 1-1/2-month high of 1.3068 franc, standing at 1.3041.
The common currency also hit a two-month high against the Australian dollar near A$1.38.
Data last Friday showed German business morale rose to its highest level since records started for reunified Germany at the start of 1991 German reunification, surging past economists' forecasts.
The euro's rebound has left the dollar languishing near two-month lows against a basket of major currencies. The dollar index last traded at 78.256, not far from a two-month low of 78.096 hit on Friday.
The dollar bought 82.75 yen, trapped in a range roughly between 81 yen and 84 yen seen so far this month.
The Australian dollar slipped 0.2 per cent to $0.9878, dented by lower-than-expected Australian producer prices.
Reuters