The euro fell for a third straight session against the dollar today, with further losses likely, as investors were unconvinced that Friday's European summit would quell concerns about the region's fiscal problems.
The US dollar also rose against most of the major currencies, helped by a retreat in oil prices. Lower oil prices tend to help the greenback as it reduces US crude oil imports.
Traders said short-term support for the euro is at $1.3862, the high on February 2nd. As long as the euro stays above that level, the uptrend for the currency remains intact, although a break below it should target the $1.3710-12 area, last week's low.
The market's focus is pinned on a European Union summit on Friday. Seventeen heads of state expected to agree on a comprehensive pact that will attempt to overhaul the euro zone economies, which should help to avert a future debt crisis. Analysts, however, said Friday's meeting was unlikely to yield results.
"The proximity to Friday's EU summit is making people nervous about the euro," said David Forrester, senior currency strategist at Barclays Capital in Singapore. "Near term we are bearish on the euro. We see the euro at $1.38 over a one-month period."
Barclays has remained positive on the euro over the longer haul. It raised its forecast on the euro over a six-month and 12-month period to $1.42 and $1.45, respectively, supported by earlier than expected European Central Bank rate hikes.
In late Tokyo trading, the euro was down 0.2 per cent at $1.3879, retreating further from Monday's four-month peak of $1.4036 on electronic trading platform EBS. That jump in the euro was a carry-over from last week's tough inflation talk by ECB president Jean-Claude Trichet, who surprised markets by flagging a possible rate hike as early as next month.
On the charts, George Davis, chief technical analyst RBC Dominion Securities in Toronto, said key Fibonacci levels are currently at play, helping to limit the rally in the euro.
For the long term, Mr Davis cited the 50 per cent Fibonacci retracement of the 2008-2010 decline at $1.3960, which is acting as resistance to the euro's advance.
On a medium-term basis, there was also the 61.8 per cent Fibonacci retracement of the November 2009-June 2010 decline at
$1.3898, Mr Davis said, and on a short-term horizon, the 76.4 per cent retracement of the November 2010-January 2011 slide at $1.3948. Both levels have also curbed the euro's gains.
Overall, with an interest rate hike looming in the euro zone, the euro's outlook has remained positive on a medium-term horizon, although traders said there was caution in the options market.
According to flows data from Credit Suisse, there was buying of bearish euro option structures overnight against sterling, the Swiss franc and the US dollar.
In addition, one-month euro/dollar implied volatility edged up, trading at 10.05 per cent, from 9.95 per cent a day earlier. That suggested slightly higher expectations of fluctuations in the currency's value.
In general, volatility tends to rise when a currency is falling.
The stance in the options market on the euro reflects some nervousness among investors that upcoming ECB rate hikes could cripple the peripheral economies in the euro zone.
The dollar also rose against the yen, gaining 0.3 per cent to 82.80 yen , helped by a generally rising trend in US Treasury yields. Yields were flat, with two-year Treasuries at 0.729 per cent, while 10-year yields slipped to 3.546 per cent from 3.555 per cent the previous session.
Dollar/yen is the currency pair most sensitive to movements in bond yields because both low-yielding units compete as the market's favoured funding currencies for the purchase of risky assets. Any shift in the yield curve or rate expectations typically impacts both currencies.
Fund managers have been buyers of dollar/yen in recent weeks, according to UBS, although the bank said choppy US yields have limited gains in the currency pair. UBS said its clients have bought $1 billion worth of dollar/yen so far this year, considered paltry given the pair's deep liquidity. The average daily volume in dollar/yen is about $140 billion.
The retreat in oil prices also helped the dollar's cause. Brent crude for April delivery fell 0.5 per cent to $112.52 per barrel. That helped the greenback move higher against the Swiss franc to 0.9366 franc, up 0.2 per cent, for a second straight day of gains versus the Swiss currency.
Reuters