By Bradley Davis Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The euro gained modestly Friday as investors who had bet heavily against the common currency continued to pare their positions, even as festering issues of euro-zone sovereign debt threatened to eventually drag the currency lower.
The approval of Germany's contribution to the EUR750 billion European Union rescue plan by that country's parliament also lent support to the common currency.
The euro's rebound caps an extremely volatile week of trading, in which the common currency hit a series of four-year lows, dropping as far as $1.2143 before rebounding as high as $1.2673.
"Investors have probably been shocked and caught on the wrong foot by the recent sharp currency moves and need some time to compose themselves," before resuming their bids against the euro, said analysts at UniCredit in Milan.
Its recovery came as investors filed back into some currencies considered riskier, such as the Australian dollar, which posted a 1.6% gain against the U.S. currency, and the Canadian dollar, which bounced from an earlier posted three-month low to gain 1.3% against the greenback by nooontime trading.
The moves followed a bruising day in global markets during which jitters over the risks to global growth from the euro zone crisis prompted a stampede out of assets considered riskier.
Friday around noon, the euro was at $1.2544 from $1.2480 late Thursday, according to EBS via CQG. The dollar was at Y90.30 from Y89.52, while the euro was at Y113.28 from Y111.75. The U.K. pound was at $1.4458 from $1.4392. The dollar was at CHF1.1508 from CHF1.1514.
The ICE Dollar Index, which tracks the greenback against a trade-weighted basket of currencies, was at 85.581 from 85.942.
With massive anti-euro bets, called shorts, already in place, "new shorts are probably in short supply," said Geoffrey Yu, currency strategist at UBS in London. This is helping keep the euro propped even as problems of sovereign debt and dim growth prospects weigh on the common currency.
The euro could rally to around $1.2730 based on investors unwinding their bets against the common currency, BNP Paribas analysts said, before the euro-zone's problems conspire to sink the common currency back toward $1.2135.
For now, the euro is enjoying some support from Germany's parliament on Friday approving the country's contribution of up to EUR147.6 billion to a massive EUR750 billion bailout from European Union countries and the International Monetary Fund for euro-zone states on the verge of a default.
The vote comes after Germany, in a surprise move, banned so-called naked short-selling of shares in 10 leading German financial institutions and in euro government bonds, as of midnight Tuesday.
Naked short selling involves the sale of an asset that isn't owned by the seller and isn't borrowed to cover the position while it is held. Some politicians have claimed the activity can be used to manipulate markets because the amount of naked short selling can dwarf sales of the underlying assets.
Investors are nervous the ban could be applied euro-zone wide, analysts said, and the euro remains vulnerable to further selling if there are fewer ways to trade a negative view on the euro zone.
"If they do introduce these bans, people have nowhere else to express," an anti-euro zone view, Yu said.
Meanwhile, the yen fell against the euro and the dollar after Japanese Finance Minister Naoto Kan said excessive strengthening of the Japanese currency isn't desirable, spooking market players who interpreted it as a hint that Japan might intervene in the market if the yen strengthens too much.
The Bank of Japan overnight left key rates unchanged.
Separately, the International Monetary Fund said Friday the Swiss National Bank should limit intervention in foreign-exchange markets to fighting extraordinary moves in the Swiss franc, adding that Swiss interest rates shouldn't be raised too soon.
The body said it endorses Swiss authorities' intention to return to a free-floating currency regime. The SNB has been suspected of intervening in currency markets to temper franc strength in the face of a weakening euro.
-By Bradley Davis, Dow Jones Newswires; 212-416-2654; bradley.davis@dowjones.com
(Martin Gelnar in Zurich and Andrea Thomas in Berlin contributed to this article.)
