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The euro found support against the dollar on Tuesday as rising risk appetite weighed on haven demand for the US currency.
The single currency, which sold off sharply on Monday as fears escalated that Greece might default on its national debt, lost ground early in the session as investors digested the news that ratings agency Standard & Poor’s had downgraded Italian sovereign debt.
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The euro was also undemined by reports that the Greek government was planning a referendum on whether to depart from the single currency.
The single currency dropped to a low of $1.3591 against the dollar, but recovered to stand up 0.1 per cent at $1.3690 as stock markets recovered and dealers reported strong demand for the euro from Asian sovereign investors.
Michael Derks at FxPro warned investors might be in danger of falling into a “euro bear trap”.
“Amid almost universal pessimism, it is becoming increasingly rare to find anyone with anything positive to say about the euro,” he said.
Mr Derks said according to conventional wisdom, the euro was doomed because there was no fiscal union, various countries were either already insolvent or rapidly approaching it, European decision-making was over-ridden by national considerations, and Europe’s south was diverging rapidly from the north.
He said despite this pessimism, the euro had not fallen that sharply from the relatively tight $1.40 to $1.45 range that it traded in against the dollar over the summer.
“Central banks and sovereign wealth funds continue to buy the euro, especially the Asians who remain desperate to diversify out of the dollar which is being deliberately debased,” said Mr Derks.
“A lower euro certainly cannot be ruled out, and it remains highly vulnerable to event risk like a sovereign debt default or more funding strife for major banks. However, the pay-off for being short the euro over the last few months has been remarkably meagre.”
The dollar also eased 0.1 per cent to $1.5710 against the pound, was 0.1 per cent weaker at Y76.46 against the yen and down 0.2 per cent at SFr0.8803 against the Swiss franc.
Rising equity markets also helped growth-sensitive commodity-linked currencies to advance against the dollar.
The Australian dollar rose 0.7 per cent to $1.0284, while the Canadian dollar climbed 0.2 per cent to C$0.9890 and the New Zealand dollar was 0.3 per cent higher at $0.8241.
