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Euro recovers after Spain's yields rise

NEW YORK (MarketWatch) -- The euro retraced its losses on Tuesday, keeping the shared currency near $1.25, after investors backed away from Spanish bonds, sending yields to their all-time high.

Trying to gauge the risks and safety nets of Spain, Greece and Italy left many traders unwilling to lift the shared currency much from its lowest level in almost two years, a day after a massive bank bailout for Spain aided the unit. Read about Spanish bond yields, insurance costs.

The euro (EURUSD) fell as low as $1.2441, before recovering to $1.2510, compared with $1.2495 Monday.

The dollar index (DXY) , which measures the greenback against six currencies, wavered between positive and negative territory. It recently edged down to 82.386, compared with 82.529 in Monday's late North American trading.

Concerns about the coming Greek elections and a lack of clarity on the Spanish bank-aid agreement had pushed the European currency down from a high of $1.2657 on Monday, in the wake of Spain's announcement that it was seeking assistance for its financial sector.

Spain's 10-year yields jumped to 6.74%, their highest closing level ever, according to Tradeweb. Italy's yields jumped, too.

Earlier, the euro was supported by traders following more technical factors.

Besides the euro, "foreign currencies may also benefit against the dollar in the very near term from the ongoing technical correction, but uncertainties ahead of this weekend's Greek elections are likely to limit upside potential," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.

The June 17 national election in Greece remained an overhang for the euro. Investors are waiting to see if any party will win enough votes to decisively follow through on the country's existing austerity measures or demand renegotiation, which would risk the possibility of the country's leaving the euro.

"Prospects of a 'Grexit' have by no means dissipated, but at least the Greek political parties are not advocating this scenario, even if they would like to renegotiate bailout terms," said Credit Agricole analysts.

"Although the [U.S. dollar] will face some softer data releases this week, it is not clear that the [euro] will be best positioned to benefit from this," they said.

Japan easing?

The Japanese yen slipped after the International Monetary Fund gave the Bank of Japan some cover to pursue "powerful monetary easing" to increase the chance of meeting its 1% inflation goal by 2014. The IMF encouraged officials to expand its asset-purchase program and possibly intervene in currency markets to limit the yen's gains. Read about IMF report on Japan.

The dollar (USDJPY) had risen as high as 79.68 yen earlier, from ¥79.45 late Monday. It more recently bought ¥79.44.

The euro (EURJPY) rose 0.4% to buy ¥99.40.

The IMF's "statements could provide important 'cover' for the [Ministry of Finance]/BoJ to intervene in the aftermath of any further euro-zone pressures," said Greg Anderson, a currency strategist at Citi. "They imply that by intervening, Japan would merely be protecting its economy from recession caused by an overvalued currency getting more overvalued."

It's unlikely that Japanese officials would intervene unless the dollar-yen drops sharply or the dollar falls below 77 yen, he wrote in emailed comments.

The dollar has gained 1.4% against the yen this month, and is up 3.3% so far this year.

Also, the BoJ is unlikely to intervene, or do anything overt like quantitative easing, until after the Greek elections.

"We believe that all the [Group of Seven] central banks are keeping their powder dry to be able to react forcefully after the Greek election, if necessary," Anderson said.

The British pound (GBPUSD) rose to $1.5583, from $1.5504.