TOKYO: The euro came off a seven-week peak on Friday as investors took a breather after a huge relief rally in riskier assets following a deal on Europe's debt crisis, though investors were eyeing more short-term gains in the currency. The deal included an agreement that private banks and insurers would accept 50 percent losses on their Greek debt holdings, leveraging of the EU bailout fund and recapitalisation of its banks. While the agreement is unlikely to solve all Europe's financial problems, the clear signs of progress, combined with healthy U.S. third-quarter GDP, changed the outlook for the dollar to strongly bearish and to more upbeat for riskier currencies. Traders said funds that had been underweight risk in the past few months piled back into markets for fear of missing out on a more sustainable rally into the year-end. In the longer term the euro remains vulnerable, however, as the EU still needs to find the money for the newest version of its bailout fund, with doubts lingering on whether its new size of around 1 trillion euros ($1.4 trillion) will be enough to staunch the crisis. "The implications of the Greek PSI (private sector involvement) and the EFSF leverage, in terms of concrete implementation and sovereign ratings in particular, are the two main sources of uncertainty," said Frederik Ducrozet, an economist at Credit Agricole. The euro, which hit a seven-week high of $1.4248, slipped 0.1 percent to $1.4171 . Traders pointed to small offers starting to build up above $1.4200 and stops at $1.4260. "Meanwhile, significant achievements have been confirmed towards a more efficient economic and fiscal framework for the euro zone, with a clear focus on boosting growth and competitiveness," Ducrozet said. The currency options market also indicated a fair amount of optimism about the euro, with declining volatility suggesting investors see less need to hedge against any negative events that may come out of Europe. Implied volatility on one-month euro/dollar options, a gauge of expectations regarding a currency's price action, fell on Friday to 13.05 percent from 14.85 percent late on Wednesday, marking its lowest in nearly two months. While those tentative signs so far bode well for the euro, traders will be able to gauge to what extent the EU deal has really improved sentiment for the highly indebted countries at an Italian auction later on Friday. The common currency was well-supported with bids between $1.4100 and $1.4120, near its 200-day moving average of around $1.4102. The 100-day moving average at $1.4075 offered additional backing. NURSING LOSSES The dollar steadied after sustaining heavy losses that caused its biggest one-day decline in more than two years against other major currencies, with more drops looming ahead. "We may see a bit of profit-taking, but I don't get the sense that the trend will change," said a sales trader for a major Japanese bank in Tokyo. The liquid dollar, with its near-zero interest rates guaranteed over the next two years, is the first to be sold off in times of global optimism, as investors use it to fund forays into risky trades. Against the yen, the dollar was at 75.89 yen , having carved out yet another all-time low around 75.66 yen on Thursday, even after further monetary policy easing by the Bank of Japan.

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