LONDON (Reuters) - The euro retreated from a near three-week high against the dollar on Monday as doubts lingered over whether a Spanish bank bailout could solve the country's debt problems, with markets also cautious ahead of Greek elections at the weekend.
The euro zone agreed to lend its fourth largest economy up to 100 billion euros to help prevent a run on banks, offering some reassurance to investors and helping the common currency jump more than 1 percent to $1.2672 in Asian trade.
But it pared those gains as traders and analysts said the details of the bailout deal were still unclear and concerns would remain about Spain's large debt burden given the country's stagnant economy.
The euro ran into selling during the European trading session and was last up 0.4 percent at $1.2571, although it remained well clear of the near two-year low of $1.2288 hit earlier this month.
"While this is good news for Spanish banking stocks and good news in the short term, I'm not certain it solves Spain's problems," said Simon Derrick, head of currency research at Bank of New York Mellon.
"Agree a bailout for Spain and the best you get is a 100-odd point rally in euro/dollar. People recognize this is not a silver bullet. I think the euro will weaken slowly over the next couple of days."
Against the yen, the single currency rose to 100.90 yen, its highest level in more than two weeks, before retracing to trade up 0.3 percent at 99.75.
Data out of China over the weekend also boosted riskier assets, helping the euro. The numbers were not as bearish as many traders had feared following Beijing's first interest rate cut since the global financial crisis on Thursday.
GREEK ELECTIONS
Traders said optimism would be temporary given caution before the June 17 Greek elections. A win for parties opposing the austerity terms of the country's international bailout could lead to Greece leaving the euro.
With the terms of the Spanish deal still not clear, there were also worries that other countries that have received a bailout - Greece, Portugal and Ireland - may protest that Spain was offered better terms than they were.
"It is positive that politicians have reacted so quickly and ahead of the Greek elections, and this will hopefully contain the risks within the Spanish banking sector," said Niels Christensen, currency strategist at Nordea in Copenhagen.
"But it is not going to boost the Spanish economy so there is still a mountain to climb to control the debt situation. The euro will continue to be vulnerable ... poor economic data and low growth or recession is the worst scenario for dealing with a debt crisis".
In the options market, one-week euro/dollar implied volatility - a measure of how volatile a currency is expected to be - rose to around 14.25 percent as investors eyed the Greek vote. One-month euro/dollar volatility also rose, to 12.6 percent compared with 12.4 percent on Friday, despite Spain's bailout which should have dampened demand, traders said.
Underscoring the prevailing bearish sentiment, bets against the euro surged to a record high in the week to June 5, while net long dollar positions extended gains, according to the Commodity Futures Trading Commission.
The higher-yielding and riskier Australian dollar was up 0.4 percent against the U.S. dollar at $0.9952, having risen to a near four-week high of $1.0005 in Asian trade.
The dollar index was down 0.4 percent at 82.022 but above an earlier 2-1/2-week-low of 81.785.
(Additional reporting by Jessica Mortimer; Editing by John Stonestreet)
