By Naomi Tajitsu
LONDON, June 27 (Reuters) - The euro recovered early losses on Monday as investors covered short positions following broad selling last week, but gains were capped due to concerns about Greece's ability to repay its debt even if passes austerity measures later this week.
Sovereign demand lifted the euro to a session high around $1.42, but the single currency teetered near a record trough versus the Swiss franc as Greece's parliament opened a debate on harsh fiscal measures before a vote expected on Thursday.
Analysts said the euro would be vulnerable to selling on any comments from Greek or other European officials which may cast doubt on the ballot's outcome, although many in the market believe the austerity measures will be approved.
Chris Walker, currency strategist at UBS, said the euro is likely to receive a boost if the measures are passed, but argued that the funding Athens would receive in return would buy only limited time before more money is needed.
"If they pass the measures it will all be very well but the problem will be in implementing the policy, and if you just push the problem back two or three months, we'll find ourselves in the exact same position in time," he said.
"We could see a little bit of a bounce in the euro when the measures go through and if you're looking at a slightly longer term, it's still fairly bearish."
He said the bank's flows showed real money investors and speculators were significant sellers of euros in the past week, and added that ongoing euro zone debt issues and a gloomier global economic outlook would push the euro down to $1.35 in the second half of the year.
By 1023 GMT, the euro was up 0.2 percent at $1.4214, having spiked up as high as $1.4224.
The currency had clawed back from a session low of $1.4102 hit in early trade. Demand from sovereign entities triggered a move higher, which was exacerbated as stop-loss orders were tripped.
Traders scrambled to cover short positions after the euro took a beating last week due to jitters that domestic turmoil in Greece may threaten the country's chances of obtaining more bailout funds.
Technical analysts said the single currency needed to close above its 100-day moving average around $1.4195, a key resistance level, to ensure a sustained rise higher, while a fall below $1.4073 would take it to its lowest in a month.
The short squeeze in the euro supported the single currency at around 1.1855 to the Swiss franc , but it continues to hover near a lifetime low of 1.1808 francs, after a dramatic rally in the safe-haven Swiss unit since April.
The possibility of a Greek default has raised concerns about the health of the European financial system and whether it can withstand such a credit event. Such worries triggered a sell-off in Italian banking shares late last week.
Overall, the dollar has benefited from broad risk aversion stemming from the ongoing euro zone debt crisis, as investors have been cutting back on short positions in the U.S. currency.
Against a currency basket the dollar slipped slightly to 75.485. But it hovered near 76.00, and a decisive break above that level would take it to its highest in a month. Versus the yen , the dollar rose 0.4 percent to 80.70 yen.
Analysts say ongoing uncertainty about debt problems in Greece and the rest of the euro zone would support the dollar.
But they warn that the struggling U.S. economy is far from stable, while Washington suffers from its own fiscal problem as it approaches its debt ceiling again, which could haunt the dollar in the longer term.
"The fortunes of the USD will be determined largely by the mood in the euro zone, as the USD is now fulfilling the role of "not being the EUR", capitalising on any bad news and retreating when the market gets more hopeful," Credit Agricole analysts said in a note.
"This has lent it more of a safe-haven status recently in relation to peripheral stories, but its reaction to softer US data remains ambiguous." (Reporting by Naomi Tajitsu)