Volume was thin ahead of the weekend, exacerbating volatility, and traders said the euro may struggle to extend gains amid uncertainty over the timing of a potential bailout.
Sources with knowledge of the matter told Reuters Spain is considering freezing pensions and speeding up a rise in the retirement age as it attempts to meet conditions of an international aid package. German Finance Minister Wolfgang Schaeuble dented expectations by saying on Friday that Spain did not need a sovereign bailout on top of the package already agreed for its banks because it was on the right path to regain the confidence of markets.
“Reports of a Spanish deal as soon as next week helped to boost sentiment and the euro. The market remains prudently bullish buying on dips,” said Sebastien Galy, currency strategist at Societe Generale in New York.
The euro rose 0.1 percent to $1.2987, having hit a session high of $1.3047 on Reuters data, not far from a four-and-a-half-month peak of $1.3169 set on Monday.
The dollar .DXY slipped 0.1 percent to 79.3331 against a basket of currencies, within sight of a six-and-a-half-month low of 78.601 hit last week in the wake of aggressive monetary easing by the Federal Reserve.
Carl Hammer, chief currency strategist at SEB in Stockholm, said the euro may rise to $1.31 or slightly higher over the coming month but would peak at not more than $1.34-$1.35 because Spain applying for funding would be “the last piece of euro-positive news.”
Spain, the new epicenter of the euro zone debt crisis after Greece, Ireland and Portugal, has been hesitating to apply for external aid, creating uncertainty in the markets. Its borrowing costs fell on Thursday at a debt auction but the relief may be short-lived.
The European Central Bank pledged this month to buy shorter-term bonds of troubled euro zone members but only after they first apply for assistance.
“The risk is that if they don’t (seek a bailout) investors will panic out of their newly bought Spanish bonds,” Societe Generale’s Galy said.
Even if Spain does request assistance, analysts say it may not be a positive sign for the euro as the tough spending cuts that come with the aid would put further pressure on an economy already in recession.
There are also concerns surrounding Greece, with negotiators still short of a deal that would unlock the next installment of the country’s 31.5-billion-euro bailout package. The dollar fell 0.2 percent to 78.10 yen, well below a one-month high of 79.21 hit on Wednesday after the Bank of Japan boosted its asset-buying program to support the country’s economic recovery.
Sterling rose to its highest in nearly 13 months against the dollar, helped by UK public borrowing data that was not as bad as expected. It was last at $1.6246, up 0.2 percent.
The high-yielding Australian dollar climbed 0.2 percent to $1.0448.
The euro’s losses earlier in the session came after reports that the Swiss National Bank sold the currency against the Australian dollar as part of its long-term diversification drive to recycle its inventory of euros into higher-yielding Australian dollars, said Boris Schlossberg, managing director of FX Strategy at BK Asset Management.
