The euro rose on Friday, heading for its first weekly gain versus the U.S. dollar in six weeks as investors who had bet on the currency's fall bought it back on fears of central bank intervention.
The Australian dollar jumped on speculation Australia's central bank may step in to support the currency. The Aussie is on track for its biggest weekly drop since October 2008, hammered by worries the euro zone debt crisis could hinder a global economic recovery.
The euro gained for a third straight session after German lawmakers approved their country's contribution to a nearly $1 trillion bailout package, and European finance ministers supported calls for new and tougher sanctions against countries that break EU budget rule.
"With the immense amount of short positions in the market and EU leaders rushing to put together a lasting remedy, the euro has certainly found its footing," said Andrew Wilkinson, senior analyst at Interactive Brokers Group in Greenwich, Connecticut.
"There has also been some market rumors that central banks would intervene, which in my mind is an unlikely event. However, the very suggestion is enough to make investors pare positions," he added.
In late New York trading, the euro rose 0.9 percent to $1.2575 after climbing as high as $1.2673 on electronic trading platform EBS. It is poised to end the week 1.8 percent higher against the dollar, following five weeks of losses.
The euro has fallen roughly 5.4 percent against the dollar this month. Its steep decline has cranked up speculation European officials may be concerned about its level.
The Australian dollar rose 1.9 percent against the U.S. dollar to $0.8314, pulling back from its lowest level since July 2009, hit on Thursday, and on track for a weekly loss of 6.2 percent. It was also up 4.1 percent against the yen.
"The aussie/yen is a good proxy for the risk trade and the yen has done well on the move away from risk in Europe," said David Kupersmith, head trader at Third Wave Global Investors, a global macro hedge fund in Greenwich, Connecticut. "It has nothing to do with the economic situation in Australia or Japan though there are signs Australia is slowing down."
EURO BOTTOMS?
The euro zone single currency tumbled to a four-year low of $1.2143 on EBS on Wednesday after Germany banned naked short selling in some securities, fueling speculation about other possible market regulations.
But it has rebounded sharply since then, leading some investors to speculate whether the currency has reached a bottom.
"It's very possible that we've seen a medium-term low. We could be back at $1.30 this time next week," Interactive Brokers Group's Wilkinson said, referring to the euro/dollar. "People have baked into the cake so many negative assumptions about where the euro could go."
Currency speculators slightly trimmed their bets against the euro, data from the Commodity Futures Trading Commission showed on Friday. The net short position on the euro fell to 107,143 contracts from the record net short position of 113,890 contracts the prior week.
Other analysts, however, remained bearish on worries about the impact of deep public spending cuts in Greece, Spain and Portugal on the outlook for growth and monetary policy.
"The fundamental outlook for the euro is still poor," said Jessica Hoversen, a fixed income and currency analyst at MF Global in Chicago. "Given the massive fiscal consolidation that you're going to see in Europe, the outlook for their real economy is poor."
Against the Swiss franc, the euro traded 0.5 percent higher at 1.4429, having recovered sharply from a slide to an all-time low around 1.3995 francs earlier in the week.
The U.S. dollar rose 0.4 percent to 89.91 yen, while it fell 0.9 percent to C$1.0603.
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