LONDON—A steadier tone prevailed in European trading Tuesday after a manic Monday across financial markets, with positive German economic growth helping the euro off its lows.
After falling sharply against other major currencies Monday, the common currency held above the key $1.28 level against the dollar and rose to as high as $1.2869 despite the continuing political deadlock in Greece.
He nonetheless recommended investors stay very cautious.
The euro was recently trading at $1.2856, compared with $1.2824 late Monday in New York. The dollar was at ¥79.94, compared with ¥79.85, while the euro was at ¥102.77 compared with 102.36. Meanwhile, the pound was trading at $1.6055 against the dollar, compared with $1.6092 late Monday in New York.
The ICE Dollar Index, which tracks the greenback against a basket of currencies, was at 80.574, compared with 80.708 late Monday in New York.
Better-than-expected economic data helped to underpin the euro. Germany's economy expanded 0.5% on the quarter in the first three months of 2012, which helped keep the euro zone from slipping back into a technical recession. The 17-country currency union recorded flat growth in the first quarter.
That helped to offset a slide in German economists' expectations, with the ZEW index showing a bigger fall than expected for May after a run of improvements.
Currency traders and strategists said they didn't expect a sustained turnaround in the euro, while Citigroup's internal flow indicators suggested people were looking to sell into any rally in the common currency.
"It's really a case of waiting to see where we get to next regarding European politics. It's likely we'll get a couple of weeks of uncertainty as the market worries about what will happen in Greece and the threat of contagion," said Sara Yates, currency strategist at Barclays in London.
With Greece unable to form a new government after more than a week of political horse-trading, new elections are seen as increasingly likely.
Traders will also focus on a Greek bond redemption and any headlines from the first news conference between new French President François Hollande and German Chancellor Angela Merkel, due after their 4:30 p.m. GMT meeting.
In terms of U.S. data, the Empire State Manufacturing survey, advance retail sales for April and monthly inflation data are due at 8:30 a.m. ET.
In emerging markets, India's central bank likely intervened heavily in currency markets to prop up the rupee, dealers said, after the local unit came close to its all-time low against the dollar.
—Francis Bray in London and Sourav Mishra and Sudeep Jain in Mumbai contributed to this article.
