Greek bond prices rallied after details of the buy-back were announced, also lifting Italian and Spanish bond prices and shoring up sentiment towards the euro. The euro climbed to $1.3049, its highest since October 23, before paring gains. It last traded up 0.4 percent on the day at $1.3035. The euro also hit a three-week high of $1.20660 Swiss francs.
Traders said stop loss orders were triggered on the euro's rise above $1.3030, and market players who had bet against the single currency squared their short positions as it firmed. There was talk of an options barrier at $1.3050 with some sovereign investors looking to sell above $1.3060. "Merkel is sounding a bit more flexible and we are getting positioning moves and a bit of flow moves," said Daragh Maher, FX strategist at HSBC. "A number of people have been trying to sell this rally and perhaps getting caught the wrong way, and that's why we are able to push higher."
A slightly better-than-expected Spanish manufacturing PMI survey - on top of signs of quicker Chinese growth - also strengthened investor appetite to take on risk. Earlier, the final reading for the HSBC China Purchasing Managers' Survey rose to 50.5 in November from 49.5 in October, as the pace of manufacturing activity quickened for the first time in 13 months. Traders said short-covering in the euro was particularly strong against the Australian dollar, which was hit by below forecast retail sales data and expectations the Reserve Bank of Australia will cut interest rates on Tuesday.
The euro rose more than 0.7 percent to hit a one-month high around A$1.2530. The Aussie weakened 0.15 percent to $1.0420, falling as low as $1.0393 at one point. The euro's gains saw the dollar index drop to its lowest in a month. The index fell to 79.918, down 0.3 percent on the day, and chartists said if it closed below its 55-day moving average of 80.086, it could weaken further. Investors had gone long the US dollar and many cut those positions and took profits. Analysts and fund managers said that despite the dollar's recent weakness, worries about the US "fiscal cliff" were likely to support the currency.
The dollar fell 0.3 percent to 82.15 yen, retreating from last month's peak of 82.84 yen. Investors pared some of the large short yen positions built on expectations the Bank of Japan will ease monetary policy. That view has gained ground on expectations that a general election later this month will bring to power the opposition Liberal Democratic Party, whose leader advocates more aggressive monetary easing to dig the economy out of deflation.