| NEW YORK
NEW YORK The euro climbed to a more than one-week high against the dollar on Monday after an orderly auction of Greek default insurance supported views that Greece's threat to the euro zone has diminished.
The euro also gained against the yen, hitting its strongest level in the almost five months since the Bank of Japan intervened to stem the currency's advance.
Investors unwound bearish bets on the euro and focused on a Greek credit default swap auction that set the payout for holders of CDS totaling about 3.2 billion euros. The auction fixed a fair value price of 21.5 cents on the euro for Greek bonds, within expectations.
That means an owner of Greek CDS would be paid 78.5 cents on the euro, which analysts said was enough to compensate for the roughly 75 percent loss investors incurred on the country's debt restructuring.
It could have been worse, some analysts said. If the new debt had been structured differently - either with a higher coupon or shorter maturity - the payout would have been much lower.
"There has been an unwinding of short euro positions because the reasons for holding those positions have not materialized," said Douglas Borthwick, managing director of FX broker Faros Trading in Stamford, Connecticut.
"The Greek CDS settled well and as expected so there has been no disorderly default in Greece. Plus, the euro/dollar basis swap continues to stabilize," he added.
In late afternoon trading, the euro was up 0.5 percent at $1.32410, after hitting a peak of $1.32659, its highest level since March 9. It cleared recent daily highs of $1.31873 and $1.31920, with stops triggered around the $1.32 level.
The single euro zone currency has risen for three straight sessions versus the dollar, with gains of 1.7 percent, its best three-day advance since around mid-January.
Borthwick expects further gains in the euro and sees fair value between $1.37-$1.40.
Dollar funding in the euro basis swap market also eased, further supporting the euro. The benchmark three-month cross-currency basis swap, a gauge of dollar demand corresponding to the relative premium for swapping euro Libor for dollar Libor, traded at -63.00 basis points on Monday.
After reaching as high as -159.500 basis points in late November, the euro basis swap has retreated amid a flood of dollar liquidity from global central banks. In general, wider spreads reflect elevated demand to borrow U.S. dollars in the currency forward market and often are a bearish signal for the euro.
Despite some easing in tensions related to euro zone debt, speculators are still holding bearish positions in the euro, though they have trimmed some of those bets. Yen shorts were at their highest level since April. <IMM/FX>
Against the yen, the euro was last at 110.363 yen, up 0.4 percent on the day, after rising as high as 110.580 yen, its highest level since late October. The dollar, meanwhile, was slightly down at 83.342 yen.
The yen, however, could stage a recovery ahead of the Japanese fiscal year-end on March 31, typically a period that attracts Japanese corporate demand for yen for repatriation purposes.
But once the year-end passes, yen selling should resume, with investors having little incentive to hold the Japanese currency except to finance forays into higher-yielding assets.
The Bank of Japan's surprise easing last month has boosted the yen's appeal as the currency of choice to fund carry trades, in which investors borrow a low-yielding currency to buy higher-yielding assets. A recent surge in U.S. Treasury yields also has made the dollar less appealing as a funding currency compared with the yen.
Three-month dollar/yen implied volatility slipped for a third straight session. Three-month implied volatility was down to 10.4 percent from 10.55 percent on Friday.
Currency performance 2012: link.reuters.com/tak27s
Dollar yen rate and 2-yr bond spread:
The U.S. economic data calendar this week is light, with an emphasis on housing. In Europe, the primary data will emerge on Thursday, with euro zone "flash" PMIs, which will help shape first-quarter forecasts for gross domestic product.
"If the PMIs are stronger than expected or there are positive surprises, that should favor the euro," said Andrew Cox, G10 strategist at CitiFX, a division of Citigroup in New York.
Meanwhile, New York Fed President William Dudley, a close ally of Ben Bernanke, the U.S. central bank's chairman, painted a mixed picture of the U.S. economy, tempering optimism over recent signs the recovery is gaining speed with warnings that it could just as easily stall out.
(Additional reporting by Julie Haviv; Editing by Leslie Adler)