The euro edged higher today but crowded bets on the currency could cause a near-term decline before it is able to take another shot at its November peak just above $1.4280.
One gauge of market positioning shows that currency speculators have ramped up their long positions in the euro to a three-year high, suggesting the single currency may come under pressure if profit-taking sets in.
Analysts said the near-term outlook for the common currency, which has gained some 4 per cent against the dollar since mid-February, also hinges on a summit of European Union leaders on Friday as euro zone countries work on measures they hope will resolve the region's debt crisis.
While investors have recently been more preoccupied with the prospect of an interest rate hike by the European Central Bank as early as next month, the debt crisis threatens to return to the fore.
"Our iFlow bond indicators confirm global fixed income managers have once again become net sellers of especially Greek and also Italian, Irish, Spanish and Portuguese exposure," said BNY Mellon analyst Samarjit Shankar.
The euro rose 0.1 per cent to $1.3981, having retreated from a four-month high around $1.4036 yesterday.
Moody's yesterday slashed Greece's sovereign debt ratings by three notches and left the door open for more downgrades, worried that the country's efforts to cut debt will not be enough. This has added pressure on the EU to thrash out a comprehensive package to deal with the euro zone debt crisis.
The euro could consolidate for some time below yesterday's high before making another move higher. In the medium-term, the euro has support in the $1.3840 to $1.3860 area, where a few intraday highs hit in late February are clustered as well as the euro's early February peak of $1.3862.
While a clear breach of that support area would point to the possibility of the euro heading back down towards $1.3700, a consolidation above that level could pave the way for the euro to test its early November peak of $1.4283.
Unrest in the Middle East and higher oil prices also bear watching, said a trader for a major Japanese bank in Singapore.
"If the situation in the Middle East does not settle down and prices of commodities stay high, and at the same differences in monetary policies become even more stark, then the euro will probably head higher against the dollar," said the trader.
A surge in crude oil prices in the past couple of weeks on concerns that the supply of oil could be disrupted by turmoil in the Middle East and North Africa have fanned worries about the impact on U.S. consumer spending and helped weigh on the dollar.
The dollar index dipped 0.1 per cent to 76.458, having had a bit of reprieve after hitting a four-month low of 76.124 yesterday.
One factor that may support the dollar and weigh on the euro in the near-term is market positioning.
"We are still USD bears, but the scale of the speculative market net shorts in the USD is significant," said Peter Frank, strategist at Societe Generale.
Latest data from the US Commodity Futures Trading Commission shows that currency speculators boosted their bets in favour of the euro to the highest since January 2008 in the week to March 1st, while bets against the dollar jumped across the board.
The dollar edged up 0.1 percent against the yen to 82.28 yen, roughly in the middle of the prevailing range seen over the past week of roughly between 81.60 yen and 83.00 yen.
The yen took in its stride news this week about cross-border corporate investment involving Japanese firms.
Western Digital Corp has agreed to buy Hitachi Ltd's hard disk drive operations for about $4.3 billion in cash and stock.
In the other direction, Terumo Corp has said it would buy US medical device company CaridianBCT from a Swedish firm for about $2.6 billion, marking the largest acquisition by a Japanese medical equipment maker.
The trader for a major Japanese bank in Singapore said it is hard to tell just how much foreign exchange flows, if any, will be generated by such cross-border investment.
In the case of Japanese firms investing abroad, they could theoretically use foreign currency deposits accumulated through their overseas earnings for such investment, the trader said.
Or they could borrow foreign currency denominated loans, which would be another option that would not involve foreign exchange, the trader added.
Reuters