The euro retreated from a near three-week high against the dollar today as doubts lingered over whether Spain's bank bailout could solve the country's debt problems, with markets wary of taking on risk ahead of next weekend's Greek elections.
The euro zone agreed to lend Spain, the region's fourth-largest economy, up to €100 billion to help prevent a run on banks, offering some reassurance to investors and helping the common currency jump more than 1 percent in Asian trade.
But gains were pared in the London session as traders and analysts said the details of the bailout deal were still unclear and concerns remained about Spain's large debt burden given the country's stagnant economy.
"The risk rally fell flat really quickly," said Greg Anderson, G10 strategist at CitiFX, a division of Citigroup in New York. "On top of the Spain news, data out of China this weekend was better-than-expected, so it seems clear the market does not want to believe good news."
"People are also very nervous ahead of the Greek elections and there are plenty of other worms in the can, namely the potential of another downgrade of Spain's debt."
The euro ran into selling during the European trading session and was last up 0.3 per cent at $1.2554. Nevertheless, it remained well above the near two-year low of $1.2286 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 recognise 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 100.88 yen , its highest level in more than two weeks, before retracing to trade up 0.4 per cent at 99.82.
Also underscoring the market's cautious tone was a rise in Spanish and Italian bond yields as initial market relief over Spain's bank funding deal gave way to doubts.
Reuters