Euro climbs from 7-week low as EU meeting eases worries

A man is reflected on an electronic board displaying exchange rates in a business district in Tokyo May 16, 2011.

NEW YORK (Reuters) - The euro bounced from a seven-week low against the dollar on Monday, buoyed by sovereign demand following last week's sell-off as a European Union meeting softened concerns about debt-burdened countries.

The euro remains vulnerable to selling on peripheral debt concerns, but news of aid to Portugal eased uncertainty and was widely viewed as a positive for the single-currency.

Euro zone finance ministers approved a three-year, 78 billion euro emergency loan program for Portugal on Monday and said Lisbon would ask private bondholders to maintain their exposure to its debt.

"After the Portugal bailout came through the euro started rallying and we saw a little bit of a short squeeze in the $1.42-$1.4230 area," said Douglas Borthwick, head of trading at Faros Trading in Stamford, Connecticut.

Currencies have been correlated to commodities, so when gold gave up its gains on Monday, so did the euro, he said.

"There is also still a lot of uncertainty about Greece and we are hopeful that tomorrow's meetings will bring more clarity."

German Chancellor Angela Merkel said on Monday that she was against debt restructuring by any euro zone country before 2013. She added that doing so would be "incredibly damaging" to the euro zone's credibility.

"Once the peripheral issues get cleaned up, focus will shift back to the U.S. debt ceiling and fiscal problems in general," Borthwick said. "We are confident the euro will hit $1.50 within the next few months."

The euro rose as high as $1.42450 on trading platform EBS on Monday and was last at $1.4176, up 0.4 percent. Earlier, it fell to $1.40481, the lowest since late March.

U.S. Treasury investors were calm as the United States hit its debt limit, with prices rising on faith lawmakers will reach a deal to increase the debt ceiling before a default.

The U.S. Treasury Department said it can stave off default until early August, in part by tapping federal pension funds, as the nation reached its $14.294 trillion debt limit.

The euro has fallen roughly 6 percent from a 17-month peak of $1.4940 hit less than two weeks ago as peripheral debt concerns resurfaced, with $1.40 seen as a key support level.

"That is a huge drop within a short space of time, so while there is no technical reason for today's bounce, I am also not surprised by it," said Jens Nordvig, global head of fx strategy at Nomura Securities in New York.

Nordvig said Nomura had some short EURUSD exposure in option form since the currency pair first traded to $1.45 in mid-April.

"We think the risk reward in EURUSD shorts is less compelling here, and we are squaring up for now, with a smallish gain," he said.

While there is a lot of focus on Greece and the rest of the periphery once again, Nordvig said, it is not translating into systemic risk in the euro zone banking system the way it did during 2010 and in January 2011.

Traders said the euro's earlier fall was met with strong demand from Asian sovereign accounts that were still keen to buy on dips, while strong bids were seen toward $1.40.

The impact of the arrest of International Monetary Fund chief Dominique Strauss-Kahn on sexual assault charges, which earlier dampened sentiment on the euro, faded as central banks started snapping up the euro after it declined to the $1.4050 level.

The dollar was flat against the yen at 80.76.

The greenback fell 0.3 percent against a basket of six major currencies to 75.520 after climbing to a six-week high of 76.001 .DXY. reached earlier in the day.

(Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Leslie Adler)