NEW YORK (Reuters) - The euro leaped to its highest level against the dollar in nearly 3 weeks on
Monday as optimism that Greece will reach a deal with its creditors led investors to pare bets against the currency even though most maintained a negative outlook.
The euro also gained against the yen, hitting a three week high. Fundamentally, a slew of factors signal a weaker euro, but with net euro short positions hitting a fourth straight record high in the week ended January 17 the currency has been prone to bouts of short covering, or bets the currency will fall.
Germany and France pressed on Monday for a rapid deal between Greece and its private creditors that would cut its soaring debt to sustainable levels and said they were committed to a sealing a new bailout for Athens by March to avert a disastrous default.
Greece aims to submit a final debt swap offer to its private sector bondholders by February 13, a finance ministry official said on Monday.
"Sentiment continues to outweigh fundamentals, at least for the time being," said Brad Bechtel, managing director at Faros Trading in Stamford Connecticut. "This euro short covering sentiment-driven rally will likely not be sustainable over the medium-term, but may persist over the short-term.
"Over the medium-term the euro should remain under pressure with the ECB more accommodative and providing liquidity."
Indeed, Europe's debt crisis is still not under control, and economic data in the region continues to point to a recession. This should keep European Central Bank policy biased toward additional easing, a negative for the euro as it would make higher yielding currencies more attractive to investors.
Analysts said that the European Central Bank's 489-billion euro injection of three-year funds late last month eased some tensions in funding markets, helping risk assets globally.
Fifteen of the 26 traders polled by Reuters said the ECB's three-year tender has given banks easier access to unsecured funds.
The euro was last up 0.6 percent at $1.3014, off a session high of $1.3052, its highest since early January. Against the yen, the single currency rose 0.7 percent to 100.18 after hitting a session high of 100.48, its best since Decembtting the ball in the court of the European Union and the International Monetary Fund.
"From the fiscer 30.
Private creditors said on Sunday they had come to the limits of what losses they could concede in a Greek debt swap, pual perspective things are looking worse than last year," said Jens Nordvig, head of G10 currency strategy at Nomura Securities in New York, noting gloomy growth forecasts across Europe.
"But because the liquidity injection is so huge, it is causing funding markets to behave better. I think it's a major success so far," he added.
Mohamed El-Erian, chief executive of giant bond fund PIMCO, said on CNBC on Monday that the European Central Bank is stabilizing banks by providing liquidity in its three-year refinancing operation.
El-Erian also said that Greece debt talks will reach agreement "at the level of negotiators," but that "execution risk is very high."
The technical outlook for the euro was improved by last week's break above the 21-day moving average at $1.2870 for the first time this year.
FOMC, EARNINGS AHEAD
For the wider market, the Federal Reserve's two-day policy meeting starting on Tuesday will be the major event. Although no policy change is expected, the Fed could take the historic step of announcing an explicit target for inflation as part of its new communication strategy.
Traders said wariness ahead of this meeting and expectations of a continued easy monetary policy also weighed on the dollar, pushing the dollar index .DXY down 0.5 percent on the day to 79.784. Against the yen, the dollar traded up 0.1 percent at 77.
The dollar hit its lowest level against the Swiss franc since December 21 at 0.9247 and last traded down 0.7 percent to 0.9274.
Meanwhile, a slew of U.S. corporate earnings reports this week should provide a gauge for the state of the world's biggest economy. Strong results could buoy risk appetite and lift growth-linked currencies but weigh on the safe-haven dollar.
(Additional reporting by Luciana Lopez and Jessica Mortimer in London; Editing by Padraic Cassidy)
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