The euro hit a three-week high versus the dollar on Thursday as worries about Spain's public finances were eased by a well covered bond auction, triggering stop-losses on stale short positions in the single currency.
The Swiss franc rose after the Swiss National Bank relaxed its interventionist stance and said deflationary risks in the Swiss economy had all but disappeared.
The spread of Spanish government bond yields over benchmark Bunds soared to a euro lifetime high on Wednesday, but a well covered auction, albeit at a high yield, led spreads to tighten and the euro to rally to a session high.
The auction went reasonably well but with rising yields it's not that much of a surprise. There are still worrying signs for Spain, particularly stresses in the Spanish bank funding market, said Lee Hardman, currency strategist at BTM-UFJ.
At 1110 GMT, the euro was up around 0.6 percent versus the dollar at $1.2375, off session highs of $1.2395. It had fallen to a low of $1.2243 as worries over Spain's public finances and banking sector dented sentiment in early trade.
We think the euro rally is being driven by position adjustment rather than fundamentals in particular, Hardman added.
Traders said stop-losses placed above this week's highs in the $1.2355/60 area were targeted and triggered in the wake of the Spanish auction.
Technical analysts at Commerzbank said the euro's correction could continue toward resistance at $1.2445/1.2570 - the 2009 low and the 38.2 percent retracement of the move down from April to June.
The euro has regained more than 500 points from a four-year low hit on June 7 at $1.1876, but is still down more than 13 percent year-to-date.
The European Union and International Monetary Fund denied on Wednesday a report they and the U.S. Treasury were drawing up a safety net for Spain. But worries about Spanish banks put pressure on bond yields and the market will be looking for the results of bank stress tests which the Spanish central bank said would be published soon.
The EU holds a summit on Thursday to discuss ways to strengthen budget discipline and economic policy coordination.
SWISS FRANC RISES
The Swiss franc rose versus the euro and the dollar after the SNB omitted specific reference to the currency in the statement accompanying its decision to leave interest rates on hold.
The SNB said deflationary risks had all but disappeared, implying its strict policy of currency intervention to prevent excessive appreciation in the franc may no longer be required.
The fact that the SNB have said deflationary risks have all but disappeared for now is very bullish for the franc as deflationary risks were associated with intervention risk, said Audrey Childe-Freeman, senior currency strategist at Brown Brothers Harriman.
The euro fell from around 1.3877 francs to a session low of 1.3759, bringing the all-time low of 1.3731. hit on June 9, into focus. The dollar fell to a one-month low of 1.1128 from around 1.1315 francs.
The dollar was down around 0.4 percent versus a currency basket .DXY as European stocks .FTEU3 and U.S. equity futures .SPc2 traded in positive territory.