The euro rebounded on Friday as an early sell-off lost steam on central bank demand and technical buying, although the currency was vulnerable due to fears about euro-zone banks and a gloomy global outlook. The single currency rose to a session high of $1,44250 (EUR=EBS) on trading platform EBS, having earlier fallen to a low of around $1,42589 as European shares suffered steep losses. The euro was also boosted by market chatter that the European Central Bank was buying Italian bonds. [GVD/EUR] "It’s a classic short squeeze. The market was leaning on the fact that the euro should have been lower given the risk sentiment and the heavy sell-off in European equities," said Steven Butler, director of FX trading at Scotia Capital in Toronto. He added that there was some decent buying from Eastern European names that further added to pressure on the euro’s net short positions. That said, Butler thinks the sustainability of the euro’s rally depends on how Wall Street performs. "I personally think the euro should be lower, but with the ongoing squeeze, we could potentially see the euro get above $1,4450. It depends on how New York equities trade," he said. US stocks were mixed in early trading. Analysts also said a statement from Spanish Economy Minister Elena Salgado on Friday that Spain will approve next Friday measures to stimulate jobs may have helped the euro as well. In early New York trading, the euro was last up 0,6% on the day at $1,44124, with weekly gains of more than 1% so far. The Swiss franc edged up, benefiting from demand for currencies perceived to offer a safe haven, although its gains were capped by ongoing speculation Swiss authorities will again step in to rein in the currency. The euro was last down 0,6% on the day against the Swiss franc to 1,13094 francs, having earlier fallen roughly 1% in choppy trade. The dollar was down 1,1% at 0,78450 franc. In the options market euro versus Swiss one-month implied vols remained at extremely high levels around 20 percent , reflecting investor jitters over the SNB’s next potential steps. Investors have been dumping higher-risk assets after weak US economic data on Thursday added to the view the global economic recovery is faltering. On the other hand, concerns that euro zone policymakers are dragging their feet over the region’s debt problems are also expected to weigh on the single currency. TEMPORARY DOLLAR SUPPORT The ICE Futures’ dollar index fell 0,6% to 73,796 as a result of the euro’s rebound. Many analysts expect the dollar, which has also struggled due to US fiscal problems, will be supported on the view that demand for the greenback will rise if signs grow that financial institutions may be facing funding problems. "Funding pressures are definitely visible in the euro area because of the vicious circle between the sovereign debt crisis and the knock-on effects on the financial system due to euro zone banks’ holdings of sovereign debt," said Raghav Subbarao, currency strategist at Barclays Capital. "That’s something that’s definitely a pressure on the euro. If funding pressures intensify radically, the dollar is the safe-haven currency. When it’s a question of liquidity, and not solvency, the dollar will benefit." Analysts said investors were becoming highly sensitive to signs of funding strains, following news earlier in the week that an unnamed euro zone bank had borrowed $500 million in one-week funds from the European Central Bank. The dollar was down 0,3% at 76,370 yen, regaining ground after earlier slipping to 76,31, within a whisker of its all-time low of ¥76,25 and spurring speculation that Japanese authorities may enter the market to stem the currency’s strength.

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