ET:Euro rises versus dollar on optimism before EU summit
LONDON: The euro hit a one-month high against the dollar on Monday after a G20 summit left hopes intact the EU would decisively address the region's debt crisis this week, with traders seeing scope for further gains on short-covering.
Some investors were wary of selling the single currency in case of a positive outcome from an European Union summit on Oct. 23. Traders said this possibility could support the euro, though it was expected to face stiff resistance ahead of $1.40.
The euro hit a one-month high of $1.39148 on EBS trading platform, up 0.25 per cent, extending gains after breaking above a reported options barrier at $1.3900, though traders cited offers up to around $1.3930.
"The closing down of short euro positions is a big reason for the move up in euro/dollar, combined with expectations the EU will come up with a plan at the summit that will cap the fear of the euro zone debt crisis spreading," said Niels Christensen, currency strategist at Nordea in Copenhagen.
He said the euro's gains were also partly due to a weaker dollar as above-forecast US retail sales data on Friday eased worries about the global economic outlook, lifting shares and dampening safe-haven demand for the greenback.
However, the euro's recent sharp gains have left it vulnerable to a pullback if investors become worried the EU leaders may not be able to contain the debt crisis.
"Generally investors would rather be long dollar and short euro and would be quick to reset those positions," Christensen said.
The euro rallied 3.5 per cent against the dollar last week after the leaders of Germany and France pledged to unveil a new package for solving the two-year crisis at the EU summit, including an agreement on how to recapitalise banks.
Expectations for the plan -- which also aims to make Greece's mountain of debt more manageable and to bolster the firepower of the euro zone's rescue fund -- helped lift the euro off a nine-month low around $1.3145 hit on Oct. 4.
"It will have a hard time going above $1.40 ahead of the EU meeting as contagion fears -- indicated by elevated levels of European bond yields -- are still showing almost no signs of abating," said Sumino Kamei, senior currency analyst, Bank of Tokyo-Mitsubishi UFJ in Tokyo.
Data showed speculators pared short euro positions in the week to Oct. 11, though traders and analysts said it was likely that not all short positions had been cleared, leaving scope for further short-covering to help the euro .
