The euro edged higher on Thursday as traders awaited the outcome of a meeting of European Union leaders that might announce a rescue package for Greece.
Greece’s fiscal woes have weighed on the euro, pulling it down to an eight-month low against the dollar at the end of last week.
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But growing hopes that Germany would lead an EU bail-out of deficit-stricken Athens have helped the single currency to stabilise in recent days.
“The optimism stemming from the belief that the EU leaders summit today in Brussels will agree some form of support for Greece continues to dictate market price action with the euro higher against the dollar, yen and pound,” said Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ.
But he said over the medium term, it was hard to see how the whole affair could be anything but negative for the euro.
“Financial support from Germany could undermine the credibility of the European monetary union project given how much the European Central Bank has emphasised in the past the need for fiscal prudence,” said Mr Halpenny.
“Furthermore, the deep cuts in wages and prices required in peripheral Europe over the coming years to regain competitiveness will require the ECB to maintain a very loose monetary stance.”
The euro rose 0.2 per cent to $1.3749 against the dollar, gained 0.2 per cent to £0.8822 against the pound and climbed 0.1 per cent to Y123.57 against the yen.
The euro dropped 0.6 per cent to a 15-month low of SKr9.9770 against the Swedish krona, however, after the country’s central bank sounded a more hawkish tone than expected after its policy meeting.
The Riksbank, as expected, left Swedish interest rates on hold at 0.25 per cent, but signalled the prospect of monetary tightening in “summer or early autumn”. Previously it had said it would raise rates in the autumn.
Elsewhere, the Australian dollar surged higher after figures showed a larger-than-expected rise in Australian employment in January and a fall in the unemployment rate to an 11-month low.
The figures heightened expectations in the money market that the Reserve Bank of Australia would raise interest rates at its policy meeting in March, having unexpectedly decided to keep them on hold at its February meeting.
Analysts said such a move would increase the attractiveness of the Australian dollar as a target for carry trades, in which low-yielding currencies such as the dollar and the yen are sold to finance the purchase of riskier, higher-yielding assets elsewhere.
Ulrich Leuchtmann at Commerzbank said he expected the RBA to raise rates by a further 25 basis points to 4 per cent next month.
“Australia is the G10 economy with the highest level of interest rates and the Aussie’s carry is even higher than that of some emerging market countries,” he said.
“Markets are therefore once again taking course for the $0.90 mark in the Australian dollar again the US dollar unless sentiment on the financial markets deteriorates again.”
The Aussie dollar was also given a boost by an unexpected slowdown in consumer price inflation in China, its largest trading partner. The currency rose 0.5 per cent to $0.8885 against the US dollar and climbed 1.5 per cent to Y79.88 against the yen.
Elsewhere, the dollar was little changed at Y89.83 against the yen, 0.1 per cent stronger at $1.5609 against the pound, but 0.1 per cent weaker at SFr1.0658 against the Swiss franc.
