The euro extended gains to a one-week high on Tuesday as some sellers pared back their huge bets against the currency ahead of a conference call by the Group of Seven financial policy makers on the European debt crisis.
Although market players remain sceptical of a major breakthrough given a lack of consensus within Europe on how to save Spanish banks and on other matters, there was caution in case the meeting leads to some kind of policy agreement, given record short positions on the euro.
"It will take a long time to resolve the debt crisis. I don't expect European policy makers to come to an agreement soon. I am ready to sell the euro around $1.2550," said a trader at a Japanese bank, says Reuters.
Canadian finance minister Jim Flaherty said ministers and central bankers of the United States, Canada, Japan, Britain, Germany, France and Italy would hold a special conference call, raising pressure on the Europeans to act.
"The real concern right now is Europe of course - the weakness in some of the banks in Europe, the fact they're undercapitalised, the fact the other European countries in the eurozone have not taken sufficient action yet to address those issues of undercapitalisation of banks and building an adequate firewall," Mr Flaherty told reporters, informs Financial Times.
"Members (of the G7) each have their own concerns over the unstable state of the world economy, and from that perspective, we must come to share the same view in some way," Finance Minister Jun Azumi said at a regular press conference.
Meanwhile, the Australian dollar rose after the Reserve Bank of Australia's decision to cut its key interest rate by 25 basis points. "There might be a perception that the RBA's rate reduction may come to a halt in the near term," says Daisaku Ueno, senior foreign exchange and fixed income strategist at Mitsubishi UFJ Morgan Stanley MS -2.91% .
The dollar lacked momentum to move against the yen, and caution over currency intervention by the Japanese authorities is supporting it above the key Y78 mark, traders said, according to Wall Street Journal.