(Reuters) - The euro held its ground in early Asian trading Tuesday, having been squeezed higher overnight as the market pared extremely bearish bets against the single currency ahead of key events in Europe this week.
The euro stood at $1.2767 after bouncing off a 16-month trough at $1.2666. Traders said buying ahead of a $1.2650 option barrier had prompted some short covering.
The single currency was also nearing strong support seen just below $1.2600, the 76.4 percent retracement of the June 2010 to May 2011 rally and the August 24, 2010 trough.
Trading activity in Asia is likely to pick up as Tokyo reopens after a holiday on Monday. Investors will also have China's December trade figures to chew on.
The Chinese report, which has no fixed release time, was published just before 0300 GMT last month. It is expected to show export growth slowing to 13.5 percent, the weakest in two years, excluding February when the Lunar New Year holidays disrupted activity.
Traders said any disappointment could weigh on currencies of countries most vulnerable to slower Chinese growth, such as Australia and emerging Asian trade partners.
Monday's short covering also helped the single currency rise against other currencies. It popped above 98.00 yen from an 11-year trough of 97.28 yen and stood at A$1.2467, off a record low around A$1.2408 set last Friday.
The rebound in the euro saw the dollar retreat 0.3 percent against a basket of major currencies .DXY. The greenback, however, was little changed on the yen at 76.86, having recently fallen from levels near 78.00.
While the euro rose against many currencies, it lost ground on the Swiss franc after the resignation of Switzerland's central bank head prompted talk the market could test the bank's resolve to cap the currency at 1.2000 euros.
The single currency stood at 1.2118 francs, having fallen to as low as 1.2097 -- its weakest in nearly four months. SNB watchers said interim central bank chief, Thomas Jordan, is likely to continue with the current SNB policy.
Societe Generale strategist Sebastien Galy said the change of SNB head had few implications for EUR/CHF, except potentially lessening the chance of the floor being raised in the short term.
Traders said there was no fundamental reasons for the short squeeze in the euro with news out of Europe continuing to paint a dreary picture.
An auction of short-term German debt drew such strong demand that yields on the issue were negative for the first time ever, a measure of how investors were putting safety above returns.
Fears over the euro zone debt crisis also led commercial banks to stash their money at the European Central Bank rather than lend to each other. Overnight deposits at the ECB hit a new record of 464 billion euros, figures on Monday showed.
Adding to the gloom, Germany and France warned Greece it would get no more bailout funds until it agreed with creditor banks on a bond swap.
The only bright spot in markets was a fall in Spanish bond yields, even as markets prepared for more debt sales from both Spain and Italy later in the week.
But traders said the move was driven by investors closing out profitable short positions after a sharp rise in yields the previous week rather than on any improvement in sentiment.
Apart from the debt sales, markets are also keenly awaiting the outcome of the European Central Bank policy meeting on Thursday. The ECB is expected to press governments to step up their efforts to tackle the debt crisis.
EURUSD continues to trade below $1.2800, and prospects for EUR remain bleak not only because of the potential headline risk but also from the EGB issuance this week totaling 21 billion euros and the ECB meeting on Thursday, analysts at BNP Paribas said.
(Editing by Wayne Cole)