The euro gained on Friday, supported by cautious optimism European leaders are closer to agreeing a plan to tackle the euro zone debt crisis, and was on track for its biggest weekly gain since January thanks to a short-covering rally.
Traders said the European Central Bank was seen buying Italian and Spanish government debt, helping the euro reach a session high of $1.3828. It was last trading up 0.2 percent on the day at $1.3809, with Middle East buyers cited.
On the downside supportive bids were seen around $1.3720-25, with stops at $1.3705 and larger buying interest around $1.3680-90. Traders also noted a large options expiry at $1.3800 for 1400 GMT.
Group of 20 finance chiefs and central bank heads meet in Paris on Friday and Saturday. Although investors are not expecting any concrete resolutions to the debt crisis to come out of the meeting, they hope it will provide an opportunity for officials to agree on the outlines of a plan in time for a European Union summit on Oct. 23.
Those hopes enabled the shared currency to recover from a session low of $1.3723, hit after rating agency S&P downgraded Spain's credit rating to AA-minus, mirroring last week's Fitch downgrade.
On the week, the euro was up nearly 3 percent, a gain that would mark the strongest weekly performance since mid-January if it is maintained through Friday.
"Hope has been the driver all week and going into the G20 meeting people are looking for more clarification on what we might get," said Derek Halpenny,
"Traders came in this morning after Spain was downgraded overnight, saw the euro hadn't really budged and that instilled a degree of confidence that the risk-off positioning squeeze is possibly not yet complete."
Expectations of the EU summit, preceding a G20 meeting on Nov. 3, are particularly high after French and German leaders pledged to unveil a new package for solving the debt crisis by the end of the month, including an agreement on how to recapitalise banks.
Those comments last weekend have dominated market sentiment throughout the week. They sparked a short-covering rally as investors pared bearish bets, helping the euro recover from a 8-1/2 month trough of $1.3144 hit on Oct. 4.
A report that the International Monetary Fund will present a plan to its executive board to make short-term credit lines available to fundamentally healthy countries hit by liquidity crises also helped support risk appetite.
EURO FACES RESISTANCE
Euro resistance is seen at this week's one-month peak of $1.3834 on trading platform EBS, a level that roughly matches a 38.2 percent retracement of a fall from around $1.4940 in May to the low hit last week.
More resistance lies at $1.3937, a couple of daily highs hit in September, as well as near $1.3957, the euro's 55-day moving average.
While the euro may claw above $1.39 by the end of the month, it looks poised to take a breather after its recent rally, market players said.
"We think the risk of a reversal in euro/dollar is quite high. Levels around $1.30-1.33 would be more fundamentally justified but it's hard to tell when market sentiment will turn," said Lutz Karpowitz, currency analyst at Commerzbank.
The euro rose 0.3 percent versus the Japanese yen to 106.16, and was steady against the Swiss franc at 1.2370 francs .
The Australian dollar was up 0.5 percent at US$1.0240 , after triggering reported stop loss orders between $1.0200 and $1.2035.
Meanwhile, the U.S. dollar edged up 0.2 percent against the yen to 76.98 , within sight of a one-month high around 77.48 yen struck this week.
read more: Olympus Wealth Management
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