The euro came off six-week highs against the dollar on Monday, as investors took profits made on its strongest weekly rally in more than a quarter and awaited a debt deal between Greece and its private creditors.
Further tension concerning Greece after suggestions that the country should give up control of its budget policy to European institutions sparked an angry reaction from Greece's Finance Minister Evangelos Venizelos, also weighed on the sentiment, traders said.
The single currency dropped 0.3 percent to $1.3178 zeroing in on immediate support formed by the bottom of the Ichimoku cloud on the daily charts at $1.3165. It rallied almost 3 percent last week as speculators covered short positions.
"The recent gains in the euro were mostly on the lack of bad news from Europe and a broad softening in the dollar, not because it has become an attractive investment overnight,» said Koji Fukaya, chief currency analyst at Credit Suisse in Tokyo.
"That's why any further gains in the currency will likely be choppy and limited to buying back. For now, all eyes are on Monday's summit and Greek talks,» he said.
The Greek debt swap deal, which would cut the long-term value of privately held bonds by just over 70 per cent, is thought to be largely in place, raising hopes that the country at the heart of the euro zone debt crisis would avoid a messy default.
But it is unlikely to be forged in time for Monday's summit, where euro zone leaders will gather to discuss budget rules for governments and ways to stimulate growth in Europe.
Venizelos said on Sunday Greece was perfectly capable of making good on its promises. «Anyone who puts a nation before the dilemma of 'economic assistance or national dignity' ignores some key historical lessons,» he said in a statement.
While riskier assets came under pressure on Monday, traders said the euro stayed vulnerable to short-covering. Data last Friday showed currency speculators boosted their net euro short positions to a fifth straight record high in the week ended January 24.
Immediate resistance for the euro is seen around $1.3250, the 50 percent retracement of the November to mid-January decline. But the clear break above the October trough of $1.3145 suggests an interim base has formed for the common currency, market participants said.
Against the yen, the euro bought 101.15, up from Friday's low of 100.60. It also firmed against the Australian dollar, climbing to A$1.2458, off an all-time low of A$1.2220 set this month.
The buoyant euro kept the dollar index .DXY pinned at six-week lows. It was at 79.01, compared with a 16-month peak of 81.784 set on Jan 13.
On the yen, the dollar stood at 76.73, steadying after two sessions of steep declines. The greenback had come under pressure last week after the Fed signaled it would not hike rates until at least late 2014 and kept the door open to additional stimulus.
The Australian dollar, which scaled a three-month peak of $1.0688 on Thursday, was one of the biggest losers on Monday shedding 0.8 percent to $1.0583.
Traders said they were also watching oil prices as a gauge of risk appetite as the conflict between the West and Iran over its nuclear ambition heats up. [Reuters]