(Reuters) - The euro on Monday recovered from Friday's seven-week low on hopes of progress on the euro zone debt crisis ahead of a European Union summit next week although investors were skeptical on the likelihood of decisive action.
Earlier reports about International Monetary Fund help for Italy, denied by the IMF, initially encouraged investors to unwind bearish positions in the euro zone common currency.
Signs of life in the U.S. consumer despite poor jobs and housing markets added to risk appetite. U.S. retailers racked up a record $52.4 billion in sales over the Thanksgiving weekend, a 16.4 percent jump from a year ago, an industry trade group said on Sunday.
Whispers of solutions continue to spread through markets and even the potential of such a plan being concocted combined with a solid start to holiday shopping in the U.S. has led to a massive shift toward 'risk-on', said Camilla Sutton, chief currency strategist at Scotia Capital in Toronto.
The euro was up 1.1 percent at $1.3373, having climbed to almost $1.3400. Traders said buying by leveraged investors helped trigger stop loss orders through $1.3355 and $1.3370. More stops were cited above $1.3420.
Steady selling had driven the currency down 7 percent from a high on October 27 to a trough on Friday.
Ahead of a euro zone finance ministers' meeting on Tuesday and a December 9 EU summit, officials said Germany and France were exploring radical methods of securing deeper and more rapid fiscal integration among euro zone countries.
Investors also took some encouragement from an unsourced report in Italian daily La Stampa that 600 billion euros could be made available to Italy, even though an IMF spokesperson denied this.
A German media report also said Germany was considering issuing joint bonds along with other triple-A-rated countries, though Berlin's finance ministry also denied this.
FOCUS ON AUCTIONS
U.S. investment bank Morgan Stanley told clients to be wary of shorting the euro in the near term but maintained their medium-term bearish view. Other analysts pointed to the risk from debt auctions later this week that follow high-profile disappointments at some recent sales.
Belgium had to pay a much higher price to issue 10-year debt on Tuesday. Sales to follow by Italy, France and Spain all have the potential to highlight the severity of the funding problems facing many euro zone countries.
The euro looks very vulnerable in a week where there is an awful amount of (debt) supply from euro zone countries. Trade will be directional and will be based on how the response is to these auctions, said Jane Foley, senior currency analyst at Rabobank in London.
Italian 10-year spreads over German bunds narrowed on Monday with dealers citing support from the European Central Bank but overall sentiment toward euro zone assets remains bearish with investors seeking a comprehensive and quick solution from policymakers to contain the debt damage.
Against the yen, the dollar was steady at 77.74 yen while it lost around 1.2 percent against the Swiss franc to trade at 0.9198 francs.
Commodity currencies outperformed the euro, with the Australian dollar jumping more than 2 percent on the day to $0.9952, having hit a one-week high. The New Zealand dollar was also up more than 2 percent at $0.7561.