(Reuters) -- The euro rose to nearly two-week highs against the dollar on Tuesday on investor relief that a bailout package for Greece finally came through after prolonged and acrimonious negotiations.
Gains, however, could fade due to hurdles about the deal's implementation and its wide-ranging implications for the struggling euro zone economy,
Euro zone finance ministers agreed on a 130-billion-euro ($172 billion) bailout for Greece on Tuesday to avert a chaotic default next month after forcing Athens to commit to unpopular cuts and private bondholders to take bigger losses.
The deal, which has been largely factored in by the market, essentially bought time for euro zone officials to put new crisis measures for the region in place over the coming months, but it does ensure that Greece will have no economic growth for years.
We're slightly higher on the euro because of relief that there's actually a deal, but there's nothing phenomenally new about it, said Greg Moore, currency strategist, at TD Securities in Toronto.
Since the rally overnight, the euro has come off a bit as markets started to digest the hurdles that have to be surmounted for the deal to push through.
The euro hit a session high of $1.32930 on trading platform EBS, its highest since February 9, after successful talks on Greece overnight. But it lost momentum, failing to take out this month's high of $1.33220.
In early afternoon trading, the euro was 0.1 percent higher at $1.32570, with near-term support at the day's low of $1.31860.
One-month implied volatility on euro/dollar slipped on Tuesday as the euro posted gains, trading at 10.80 percent. Volatility has declined for a fourth straight session, although it was above levels of a week ago when euro volatility dropped to single digits.
Meanwhile, euro risk sentiment has improved based on the 25-delta risk reversals, but there were trades that favored a much steeper decline in the euro zone common currency.
Overall, there was still anxiety in the options market despite the Greek deal.
Morgan Stanley, for instance, has forecast euro/dollar to drop to $1.15 by year-end, reflecting a slew of uncertainty including a Greek recession possibly for many years and further European Central Bank easing.
Euro weakness is likely to stay with us. A bearish euro/dollar call is starting to work out as the market values European Monetary Union tail risks more realistically, wrote Hans Redeker, global head of currency strategy at Morgan Stanley in London.
Euro zone consumer confidence, meanwhile, rose for the second consecutive month in February as Europeans showed signs of increased spending after last year's collapse in morale.
The International Monetary Fund forecasts a 0.5 percent contraction in the euro zone economy in 2012.
Investors remain concerned about how Greece would implement the harsh austerity measures demanded of it, while some also saw longer-term risks to the euro following an expected second injection of cheap funds by the European Central Bank next week.
There are still many hurdles to jump before Greece becomes a non-issue for markets and broader European problems should keep the euro weighed to the downside over the near term, said Camilla Sutton, chief currency strategist at Scotia Capital in Toronto.
Sutton said her first-quarter forecast for the euro is $1.29 with a year-end target of $1.25.
The euro may get a lift if euro zone provisional purchasing managers' surveys on manufacturing and services activity on Wednesday and Thursday's German Ifo sentiment survey show some improvement.
YEN AT MULTIMONTH LOWS
Approval of the Greek deal saw the euro hit a fresh three-month high against the yen. It pulled back from that high of 106.010 yen and was last up 0.2 percent at 105.670 yen.
The yen hovered near multimonth lows against most other major currencies as last week's surprise easing by the Bank of Japan prompted speculators to step up selling of the yen.
Our end-year forecast of 80 yen has almost been hit already, said Mansoor Mohi-uddin, strategist at UBS. The risks are now to the upside to this forecast with dollar/yen likely to trade in a 75-85 range in future compared to 75-80 previously.
The dollar was last up 0.1 percent at 79.690 yen, not far from 79.89 yen hit on Monday, a 6-1/2-month high.