The euro rose against the dollar on Tuesday after Spanish bill sales went through smoothly and a survey showed a rise in German analyst and investor sentiment, easing some of the market's concerns over euro zone debt.
However, analysts said Spain's precarious fiscal position would remain a worry and the most important test would come with an auction of Spanish 10-year debt on Thursday, which could put the euro back under pressure.
Spanish 10-year government bond yields dipped below 6 percent after jumping on Monday on fears its deficit and weak economy may force it to seek international help. Analysts said these concerns would limit the euro's gains with most investors still bearish about the common currency.
We shouldn't read too much into the Spanish bill auction or into the ZEW data - the German Ifo survey (on Friday) and Spanish 10-year auction will be more important, said Gavin Friend, currency strategist at nabCapital.
The target for the euro is $1.32/$1.3225 but I don't see it much above there.
He said the euro would face further tests with the G20 and IMF meeting at the end of this week and the first round of the French presidential election on April 22.
The euro was last flat on the day at $1.3135, having earlier surpassed Monday's high to hit $1.3173, with traders saying stop-loss buy orders were triggered on the breaks above $1.3150-60. They said a U.S. bank and Swiss investors had bought euros.
More gains would see it target the 55-day moving average at $1.3204, with the euro also supported by the German ZEW survey which showed analyst sentiment in Europe's largest economy rising unexpectedly in April to its highest level since June 2010.
The common currency hit a low of $1.2995 on Monday before rebounding as investors who had earlier initiated bearish bets reversed those positions. Analysts said the bounce above $1.30 suggested that level was an important support that could be difficult to breach. Once below there, however, traders could focus on a move towards the January low of $1.2624.
I think we'll see a test of $1.30 within the next week, said Niels Christensen, currency strategist at Nordea in Copenhagen, adding concerns about Spain's elevated debt, shrinking economy and high unemployment would keep the euro weak.
ANOTHER SPAIN TEST
Investors were relieved as Spain sold 3.2 billion euros of 12 and 18-month bills, although at much higher yields compared with a month ago. Thursday will see a far bigger test when Spain sells 10-year and two-year bonds.
Compounding Spain's fiscal woes, its banks borrowed a record 316.3 billion euros from the European Central Bank in March, almost double February's total, as they remained all but excluded from wholesale credit markets.
The euro was up 0.3 percent at 106.0 yen, recovering from a trough of 104.63 yen on Monday, a level not seen since mid-February.
The euro and other riskier currencies could be helped further if U.S. housing data and industrial output for March, due at 8:30 a.m. EDT (1230 GMT) and 1315 GMT come in on the stronger side of expectations.
The dollar rose 0.3 percent against the safe-haven yen to 80.64 yen, above a seven-week low of 80.29 hit on Monday.
The higher-yielding Australian dollar edged up 0.2 percent at $1.0370 as stock markets recovered. It cut earlier losses after Reserve Bank of Australia policy meeting minutes showed it would consider cutting interest rates in May if data confirmed a benign inflation outlook.