The euro edged up but was still near four-year lows against the dollar on Tuesday as a short squeeze showed signs of waning and funds were expected to resume selling on persistent worries about Europe's financial system.
Higher-yielders such as the Australian and New Zealand dollars bounced 1 percent up against the yen as investors covered some of their extreme short positions after Asian stock markets gained, despite Wall Street's tumble on Monday.
The euro also rose against the yen after hitting its lowest in more than 8 years at 108.06 yen on Monday, and one trader said it had technical scope to rebound towards 111 yen.
But the market remains bearish on the euro generally, with Monday's four-year low of $1.1876 still a downside target, followed by expected options triggers around $1.1850.
U.S. Federal Reserve Chairman Ben Bernanke said European leaders were committed to ensuring the survival of the euro and had enough money to meet obligations of heavily indebted member countries.
But traders remained sceptical.
"Although nothing has changed, moderate gains in regional stocks helped investors, probably led by speculators, to cover short-positions in yen crosses but such gains are likely to be limited," said Kazuyuki Kato, treasury department manager at Mizuho Trust & Banking.
"The market remains sensitive to negative news on Europe and it will be difficult for the euro to move higher around the $1.20 level."
The euro rose 0.3 percent to $1.1960, with support expected at Monday's $1.1876 low. The currency fell 0.3 percent on Monday, after losing more than 2.7 percent last week.
Traders say the next option trigger for the euro comes at $1.1850, with another likely target at about $1.1825, its March 2006 low. Below that, traders saw little support until its November 2005 low around $1.1640, although its 1999 launch level of $1.1747 was also a potential key marker.
It rose 0.7 percent to 109.70 yen after falling 0.9 percent on Monday. Immediate support is seen at about 107.95 yen, the 76.4 percent retracement of its move up from a low in October 2000 to a high of 170 yen in July 2008.
Finance ministers from the debt-stricken euro zone agreed to set up a safety net arrangement on Monday.
Germany's government agreed a package of austerity measures and Hungary promised cuts to meet budget targets, but financial markets continued to fret over the region's banking systems.
Spreads over German Bunds widened, reflecting those concerns. The 10-year Italian/German spread came close to 180 basis points — a euro lifetime high — while Spanish/German spreads moved above 200 basis points for the first time.
"The near-term market driver should be developments in European peripherals with particular focus on Hungary," JP Morgan said in a morning note.
"As there are many auctions in the euro area countries this week, results from these auctions would affect government bond yield spreads between European peripherals and Germany and their impact on risk assets and forex."
Euro zone governments will issue about 27.5 billion euros worth of new bonds this week, with Spain, Portugal and Italy all due to hold auctions. Spain faces redemptions and coupon payments worth more than 20 billion euros in July, raising worries it may face a difficult month of refunding.
Meanwhile, the dollar index slipped to 88.265 after hitting a 15-month high of 88.708. The focus is on 89.624, the high hit in early March 2009 when the global financial crisis was still playing out.
The dollar climbed 0.4 percent to 91.76 yen, having lost some ground on Monday as yen gains against riskier currencies weighed on the pair.
The Australian dollar jumped more than 1 percent to $0.8204, with talk of hedge fund buying. Against the yen, it rose 1.6 percent to 75.24 yen.
But the outlook for the Aussie remains difficult. Aussie one-month 25 delta risk reversals — seen by many as a barometer for short term fear — were once again showing an extreme bias for puts, sitting at 4.4/5.4 percent, up from around 3.50 percent on June 3.
The New Zealand dollar climbed 0.7 percent to $0.6628, having slid more than 1.7 percent on Monday. It rose 1 percent to 60.83 yen.
