NEW YORK (Reuters) - The euro rose against the dollar on Friday, posting its first weekly gain in seven weeks on hopes Cyprus will find a solution before Monday to avert a financial meltdown.
Finance ministers of the 17-nation euro zone will hold talks on Sunday on the bailout crisis in Cyprus, two euro zone sources told Reuters on Friday.
The meeting was scheduled as Cypriot leaders said they were closing in on a deal to raise enough money in return for a bailout and as the country reached a deal to spin off the Greek units of its debt-ridden banks.
The EU has given Cyprus until Monday to raise the 5.8 billion euros it needs to secure a 10 billion euro international lifeline. Without aid, the European Central Bank will cut funds to Cypriot banks and the country may be forced to exit the euro.
"Although there are still significant uncertainties, our base-case scenario is that a deal will be reached" by the deadline, said Vassili Serebriakov, currency strategist at BNP Paribas in New York.
The euro rose 0.7 percent to $1.2994, with traders citing buying by a UK bank. It hit a four-month low of $1.2843 earlier in the week after Cyprus rejected a proposal to tax bank deposits in exchange for a European Union bailout.
On the week, the euro rose 0.5 percent.
Cypriot leaders are discussing with their international lenders the adoption of a levy of more than 10 percent on bank deposits over 100,000 euros ($130,000), a ruling party official said.
Even though the crisis in Cyprus has sparked fears of bank runs in other troubled euro zone economies, bond yields in Spain and Italy have been stable, suggesting little signs of market stress.
Citigroup, in a note to clients, said with Cyprus being such a small piece of the euro zone and with G10 countries holding such small amounts of Cypriot assets, the impact of even worst-case scenarios on the euro may not be bigger than 1 to 2 percent.
"In some ways, the worst-case scenario for the euro was the ugly precedent that would have been sent by the rejected deposit tax," the firm said. "A solution that results in bigger losses for some stakeholders but a prettier final precedent from this crisis could prove mildly euro positive at this juncture."
Strategists said the euro could struggle to break above $1.30 as recent data underscored a worrying outlook for the euro zone economy.
Against the yen, the euro hit a two-week low of 121.45 yen after Germany's Ifo survey of business morale fell short of expectations. [ID:nB4E8MC02Q]. It later recovered and was last trading up 0.3 percent at 122.72 yen.
Asian investors were cited as buyers of short-dated options, betting on drops to 121 and 120.50 yen.
The dollar fell 0.4 percent to 94.51 yen, having earlier fallen to 94.18 yen. The highly liquid Japanese currency tends to be bought during times of economic uncertainty and heightened financial market stress.
On the week, the dollar gained about 0.1 percent.
On Thursday the dollar shed about 1.2 percent as investors covered their negative yen bets after new Bank of Japan Governor Haruhiko Kuroda disappointed investors who had expected stronger hints of aggressive monetary easing.
The dollar index .DXY, which tracks the greenback versus a basket of currencies, fell 0.4 percent to 82.384, retreating further from last week's seven-month high of 83.166.
Sterling rose 0.4 percent to $1.5228, paring gains after Fitch Ratings warned it was likely to downgrade Britain in the coming weeks, citing high government debt levels and weak growth.
Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Kenneth Barry