Investors eye potential Greece rescue

The euro rose the most against the dollar in more than two months on Tuesday, lifted by reports of a possible European bailout for debt-strapped Greece.

A senior German ruling coalition source told Reuters euro zone governments have decided in principle to help Greece. Concerns about the country's public finances and the potential contagion effects have hit the euro and soured risk appetite in recent weeks.

The single currency later trimmed gains after a spokesman for the German government said reports that the euro zone has made a decision to aid Greece were "unfounded".

"In an environment where the market was increasingly leaning towards the 'the inevitable,; i.e. the bailout as a matter of timing and not probability, the news was almost accepted as a fait compli," said Matthew Strauss, senior currency strategist at RBC Capital Markets in Toronto.

In late New York trading, the euro was up 1 percent on the day at $1.3782, on track for its best daily percentage rise since late November.

The euro has fallen 9 percent from a 15-month high of $1.5145 reached in late November over growing fears about fiscal problems in Greece, Portugal and Spain.

"If they do come and help Greece, (that) would do it for now. It would help bring the euro back from the multi-month lows,'' said Greg Salvaggio, senior vice president for capital markets at Tempus Consulting in Washington.

European Union leaders will hold a special summit on the economy on Thursday amid the increasing worries that Greece and other so-called peripheral euro zone economies, including Spain and Portugal, cannot handle their debts and deficits.

EU Economic and Monetary Affairs Commissioner Joaquin Almunia said the situation in Greece was difficult and a common concern for the EU.

The euro also rose 1.3 percent to 123.47 yen. It fell to its lowest level in nearly a year on Friday.

Some analysts said the euro's rise also reflected the unwinding of what was seen as extreme positioning by investors betting a weaker euro zone member might default on debt.

The latest data from the Commodity Futures Trading Commission showed a record build-up of short euro positions, according to Barclays.

"Bearish trades on the euro and those in favour of further spread widening are so heavy that people are just trying to reduce those bets, having made some profits," said Sebastien Galy, senior currency strategist at BNP Paribas in New York.

Speculation about a Greece rescue helped lift stocks and boost investors' appetite for risk, which weighed on the yen as investors borrow in the Japanese currency to finance their investments in riskier assets.

The dollar was last up 0.3 percent at 89.56 yen. Against a basket of currencies, the dollar fell 0.6 percent to 79.799.

Sterling initially fell after ratings firm Fitch said Britain was among the most vulnerable of triple A sovereigns, but recovered with news about a possible Greek bail-out. It was last at $1.5704, up 0.7 percent.

The so-called higher-yielding currencies such as the Australian dollar gained. The Aussie dollar was up 1.5 percent at US$0.8778 and the New Zealand dollar rose 1.7 percent to US$0.6947 .

- Reuters