The dollar bounced against major rivals in Asia on Monday, as uncertainty following news of North Korean leader Kim Jong-il's death increased the U.S. unit's safe-haven appeal.
North Korean state television reported the demise of the leader of the reclusive nation, which had begun the process of transferring power to his son Kim Jong-un.
Against the yen, the dollar bought 78.15, up from around 77.86 yen shortly before the news of Kim's death. The dollar index <.DXY> was at 80.420, up from 80.303 before the news but down from a session high of 80.317 and below last week's 11-month peak.
The euro, hurt by fears of European sovereign ratings downgrades, remained under pressure after its worst weekly performance in three months.
The single currency stood at $1.2999, down from a high of $1.3049 hit early in the Asian session but off an 11-month low of $1.2944 hit last week. A trader at a major Japanese bank cited stops placed below its immediate support at $1.3000.
Resistance lies at $1.3090, which would be a 50 percent retracement of its recent move from $1.3236 to $1.2944. Another key barrier lies at $1.3125-45.
Short-covering could also underpin the currency. IMM data released on Friday showed net short positions in the euro against the dollar totaled 116,457 as of Dec. 13, following a disappointing EU Summit.
With such large short positions, it's very possible that the euro could get a brief lift on shortcovering in thin conditions ahead of the end of the year, even though pressure remains from the downgrade concerns, said Koji Fukaya, chief currency analyst at Credit Suisse in Tokyo.
For now, investors are likely to focus on a euro zone finance ministers teleconference call from 9:30 a.m. EST about the draft text of a new fiscal compact agreed earlier this month. Talks will also include the size of individual bilateral loans to the International Monetary Fund.
The European Central Bank is preparing this week to prop up euro zone lenders with three-year low-price loans to revive the struggling interbank lending and funding market.
Banks could take an estimated 250 billion euros ($326.2 billion) at the first auction of the three-year loans on Wednesday. Some hope the banks will use the funds to buy EU sovereign debt and pull yields down. Any sign of improving credit conditions in the euro zone would provide support for the single currency.
The euro remains highly vulnerable to more EU ratings downgrades as France faces up to a double-notch cut by Standard & Poor's which put a raft of European nations on review earlier in December.
Investors are already positioning for the worst, traders said.
As soon as the announcement comes out, there will be a short-term negative impact but it's all baked in the cake for Europe, said David Scutt, a trader at Arab Bank Australia.
But some analysts say the European unit has even more room to fall next year.
Nomura Securities recommends booking profits for now, in the wake of the euro's 3 percent drop last week, solid bond auctions in Italy and Spain and a narrowing in spreads on the bonds of Belgium and France, but it forecasts the euro will fall as low as $1.2000 by the end of the first quarter of 2012.
On Friday, Moody's cut Belgium by two notches to Aa3 from Aa1, citing risks to economic growth and the costs of bailouts of banks such as Dexia (DEXI.BR).
This came in addition to Fitch's warning it could may downgrade France and six other euro zone countries as it believes that a comprehensive solution to the region's debt crisis is technically and politically beyond reach.
The Australian dollar eased to $0.9902 from $0.9922 shortly before the news of Kim's death, and was down from $0.9987 in late New York trade on Friday.
The Aussie lost 2 percent last week but did manage to bounce from lows around $0.9862, with support seen around $0.9862 with resistance at $1.0052.
(Additional reporting by Antoni Slodlowski in Tokyo and Reuters FX analyst Krishna Kumar and Cecile Lefort in Sydney; Editing by Edwina Gibbs)