Asian shares and the euro edged up from lows on Monday as opinion polls showing a lead for Greece's pro-bailout camps helped ease risk aversion and calm fears of a disorderly exit by Athens from the single currency.
The recovery looked vulnerable, however, as MSCI's broadest index of Asia-Pacific shares outside Japan added 0.4%, after hitting its lowest level since late December on Friday.
The pan-Asia stock index posted a third consecutive week of losses last week for its longest losing streak in six months. The index has now wiped out all its gains for the year, having been up some 15% from end-2011 levels in late February.
Japan's Nikkei average was flat, after posting its longest weekly losing run in 20 years last week.
Investors sold off riskier assets and fled to the safety of the U.S. dollar last week on mounting concerns about Greece and instability in the Spanish banking sector, amid a lack of immediate policy responses from European leaders.
While hopes remain that a compromise can be found that will keep Greece in the euro zone, talk of contingency plans have emerged for the possibility that Athens leaves euro, posing severe contagion risks to the whole European currency bloc.
Surveys showed on Saturday Greece's conservatives have regained an opinion poll lead that would allow the formation of a government committed to keeping the country in the euro zone.
Uncertainty, however, will persist until Greece holds the crucial election on June 17, keeping markets guarded. Several meetings of European leaders are also scheduled late in June.
Switzerland is drawing up plans for emergency measures including capital controls in case the euro collapses, although it does not expect to need them and will continue to defend a cap on the franc in the meantime, the head of the central bank said.
Currency speculators raised long dollar positions – bets the currency will strengthen – to the highest level since at least mid-2008, while euro short positions rose to the highest on record, Commodity Futures Trading Commission data showed on Friday.
Speculators also were net short on the Australian dollar, having cut their net long positions all month.
The dollar index measured against key currencies rose to a 20-month high of 82.461 on Friday, and was off around 0.5% at 81.995 on Monday.
The index faces a major resistance at 82.59, which roughly corresponds to $1.2455 in the euro and is the 61.8% retracement of the 2010-11 dollar decline, technical analysts say. The lack of a strong rebound after a relatively one-way drop and its failure to test the previous $1.2625-40 base posed a clear sign of its intrinsic weakness, they say.
Trading is expected to be subdued on Monday amid a lack of key economic data and a U.S. market holiday for Memorial Day.
A firmer euro helped lift spot gold up 0.1% at $1,575.79 an ounce. A weaker dollar helped boost oil, with U.S. crude up 0.9% at $91.68 a barrel and Brent up 0.5% at $107.33 a barrel.
EURO ON GUARD
The euro rose 0.6% at $1.2591 on Monday while the Australian dollar climbed 0.5% to $0.9844, well above a six-month low of $0.9690 hit last week.
The euro fell to its lowest since July 2010, on Friday at $1.2495, after the president of Catalonia, Spain's wealthiest autonomous region, said it was running out of options for refinancing more than 13 billion euros ($16.27 billion) in debt due this year.
"In the absence of bold policy responses from Europe so far, we recommend being long the USD and JPY," Barclays Capital analysts said in a research note. "Should data or headlines surprise to the upside, safe haven longs may see some unwind, and we favour fading these moves," they said.
Sentiment has been weakening on fears that rising bank rescue costs could force the euro zone's fourth largest economy to seek an international bailout.
A government source said on Sunday that Spain may recapitalise its fourth-largest bank, Bankia, which last week asked for 19 billion euros in funding ($24 billion), with government bonds in return for shares.
Investors cut their risk exposure across assets. Data from EPFR Global showed in the week ending May 23, emerging markets equity, commodities and energy sector funds and Europe equity funds all saw redemptions in excess of $1 billion, while high yield bond funds had their biggest outflows in over nine months.
