Euro holds gains, Aussie firm on rate hike talk

The euro held firm on Tuesday as investors pared some of their record short positions ahead of the quarter's end and with sentiment also boosted by Greece's success in raising money from the debt market.

The yen edged up against the dollar and the euro partly on Japanese exporters' selling, but buying of dollars for Japan's new fiscal year starting on April 1 also seemed to have emerged, traders said.

Losses in the two pairs dragged down other yen crosses, with the Australian dollar slipping from its highest level in more than two months of ¥84.90 hit on Monday.

"Risk tolerance seems to be improving gradually, given firm stocks and commodity prices as well as a temporary easing of concerns about Greece," said Tomohiro Nishida, treasury department manager at Chuo Mitsui Trust and Banking.

"I still see a risk for the euro to fall towards $1.30. But in the short term the euro probably has a little more room to rise on investor short-covering up to around $1.3600," he said.

Players in Europe and the United States will likely further square euro short positions towards the Easter break this weekend and at the end of the quarter on Wednesday, while Japanese banks will refrain from building new positions in the euro to avoid losses at the fiscal year-end, a Japanese trust bank trader said.

The euro was around $1.3483, steady from late Monday in New York when it gained 0.5 percent and pulled away from a 10-month low below $1.33 last week

Near-term resistance for the euro is seen around $1.3507, its Monday high. Subsequent resistance is around $1.3540, a 50 per cent retracement of the currency's decline from a high of $1.3817 on March 17 to a low of $1.3265 on March 26.

Market talk of option-related selling around $1.3500 prevented the euro from rising further, traders said.

The euro was down 0.3 per cent at 124.30 yen after briefly rising above 125 yen on trading platform EBS on Monday. Players are watching if the euro will rise and stay that level after having failed to do so since late February, traders said.

Greece's debt management agency sold €5bn ($6.72bn) of new seven-year debt, but with a yield more than twice what Germany pays.

Despite recent gains in the euro, analysts saw limited upside potential for the single currency given that the euro zone's debt problems and weak growth mean the European Central Bank is in no rush to hike interest rates.

"This appears to be a short-term reprieve for the euro," said John Horner, a currency strategist at Deutsche Bank. "Apart from the festering debt-related problems, I think some strong US data later this week could also give a lift to the U.S. dollar."

Investors were a bit more optimistic about the US economy, with payrolls data due later this week expected to show employers added 190,000 new jobs in March.

The dollar index was down 0.2 per cent at 81.19 and the greenback slipped 0.3 per cent to ¥92.18.

Thomson Reuters data shows the dollar index correlation with equities weakening, with a 90-day correlation with the Standard & Poor's 500 Index around zero. This may signal a change in the dollar's pattern of tending to fall when stocks rise.

Investors in the United States will be watching for consumer confidence and S&P Case/Shiller house prices later on Tuesday.

The Australian dollar was firm at $0.9188 after posting its biggest one-day rally in six weeks, helped by growing talk of a rate hike and higher commodity prices.

An Australian central bank watcher argued that the Reserve Bank of Australia (RBA) is likely to lift interest rates next week to 4.25 per cent.

RBA watcher Terry McCrann said it would be "extraordinary" for the RBA to not lift rates next week after Governor Glenn Stevens said in a television interview on Monday that rates had been too low and could not stay at previous levels.