LONDON, June 11 (Reuters) - The euro was supported on Friday on the back of higher stocks, but the single currency struggled to extend its short-covering rally versus the dollar ahead of technical resistance, while options barriers also capped gains.
A 0.3 percent rise in European shares .FTEU3 helped to support the euro, but its climb petered out around $1.2150, where options were due to expire later in the day.
That level also provided technical resistance, as the $1.2150-1.2155 region had offered some support during the euro's downward move in May. A break through $1.2150 this month opened the way to a fall to $1.1876 this week, its lowest in more than four years.
Euro/dollar is approaching an important level at $1.2150 -- above that point could see the ongoing correction extend to the upside, said Dag Muller, technical analyst at SEB in Stockholm.
Should we fail to take it out, the market could start to sell, and we can easily get back to those lows.
Many in the market expect the euro will stay under selling pressure in the longer term on concerns that debt problems in some euro zone countries are spreading into others.
But some investors breathed sigh of relief after European Central Bank President Jean-Claude Trichet on Thursday said three-month emergency loans to banks would continue until September.
He also pledged to keep euro zone liquidity flush until the end of the year.
By 0729 GMT, the euro EUR= had risen to $1.2120. Earlier in the day it rose as high as $1.2148 on Reuters data.
Along with the $1.2150 level, market participants said $1.2135 was also in focus, roughly the 50 percent retracement of the euro's 200-2008 rally.
Against the yen EURJPY=R it rose 0.3 percent to 110.91 yen, above an 8 1/2-year trough of 108.86 yen hit on Monday.
European shares were boosted by higher equity markets in Asia and the United States, reflecting slightly better risk demand all week due in part as strong Chinese export data and helped to spur optimism about the global economy.
The dollar inched up 0.2 percent to 91.50 yen, and was little changed against a currency basket at 87.119 .DXY.
The Australian and New Zealand dollars slipped across the board as traders booked profits on their rallies this week.
Despite the euro's selloff at the start of the week, it is poised to end 1.5 percent higher against the dollar as investors have been left with stale short positions in the currency after its fall to $1.1876.
It has already shed 1.5 percent this month and nearly 16 percent this year, driven ever lower by fiscal concerns in the euro zone.
Some analysts said the market would focus on an auction of Italian bonds later in the day. On Thursday, the euro got a lift when strong demand for Spanish bonds eased concern about the country's ability to finance its debt.
If the auction is met with strong demand and outperformance in European peripherals continue, it is likely to support risk markets and high beta currencies at the cost of USD and JPY, JPMorgan analysts said in a note. (Additional reporting by Tokyo Forex Team, editing by Mike Peacock)