NEW YORK The euro rose to a near two-week high against the U.S. dollar on Monday, buoyed by appetite for risk on optimism that Greece will receive more funding and signs of progress on resolving a looming U.S. fiscal crisis.
The common currency shared by the 17 euro zone countries, however, is still down 1.2 percent so far in November and analysts said it should struggle to retain gains even if concerns about Greece abate.
Euro zone finance ministers will give a tentative go-ahead for the disbursement of 44 billion euros in emergency loans to Greece on Tuesday, but the money will only be paid on December 5 if the country meets all remaining conditions.
While the promise of additional funds for Greece removes an important psychological obstacle, the country's economic influence in the euro zone is relatively minor compared with that of debt-burdened Italy and Spain.
Spain is the euro zone's fourth-largest economy and it has not yet applied for a bailout. A bailout request would likely cause the euro to rally above $1.30, according to strategists, as it would pave the way for the European Central Bank to buy Spain's bonds and lower the country's borrowing costs.
"For the euro/dollar to see an extended run ... a serious improvement in risk appetite is needed, with a Spanish bailout or an exceptionally quick compromise to the U.S. fiscal slope necessary as the proper catalyst," said Christopher Vecchio, currency analyst at DailyFX in New York.
The euro was last up 0.5 percent at $1.2804, having hit a high of $1.2819, its highest since November 7.
Another negative for the euro is the fact that the euro zone's economy remains mired in a recession while the U.S. economy has been steadily improving, as made evident by the latest data on the housing market.
Home re-sales unexpectedly rose in October while home-builder sentiment rose to its highest in more than six years.
Analysts at Morgan Stanley recommended buying the euro at $1.2730, with a target of $1.33 and a stop at $1.2650.
FISCAL CLIFF CLIFFHANGER
Risk appetite improved, with world stock markets recovering some of their sharp losses last week, fuelled by comments from U.S. lawmakers who indicated that compromises are possible in negotiations to avert $600 billion in tax increases and spending cuts due to start kicking in January.
Many believe this "fiscal cliff" threatens to send the U.S. economy back into recession, but the dollar would benefit in this scenario due to risk aversion.
The dollar should weaken against the Canadian dollar and British pound into year-end, according to Camilla Sutton, chief currency strategist at Scotiabank in Toronto.
"The focus post-U.S. election has been on the fiscal cliff, which we recognize as an important risk; however we believe that markets have moved too far into tunnel vision and are neglecting other important dollar drivers," she said.
"The most important of which is the Fed meeting on December 12, where we expect QE3 to be expanded to include Treasuries (at the conclusion of Operation Twist)."
The Fed's Operation Twist entails selling short-term securities in exchange for long-term bonds.
Meanwhile, investors have been selling the yen after elections were called for December 16 and the leader of the opposition Liberal Democratic Party called on the BOJ to print "unlimited yen" and set rates at zero or below.
The yen slipped from its highs into negative territory during late New York trade against the greenback. Caution prevailed ahead of Tuesday's BOJ policy meeting, with most analysts expecting no new monetary easing.
"The BOJ is meeting tonight and we don't expect additional easing steps. But I think markets are looking ahead to how the BOJ will react to a new government with an extremely dovish stance," said Eric Viloria, chief currency strategist at Forex.com.
"There is a possibility that there could be less independence for the central bank going forward and the market is preparing for that," he said.
The dollar last traded up 0.14 percent to 81.38 yen, according to Reuters data.
(Additional reporting by Daniel Bases in New York and Anooja Debnath in London; Editing by Dan Grebler)