The euro rebounded Friday as an early sell-off lost steam on central bank demand and technical buying, although the currency was vulnerable due to fears about Eurozone banks and a gloomy global outlook.
The single currency rose to a session high of $1.44250 on trading platform EBS, having earlier fallen to a low of around $1.42589 as European shares suffered steep losses. The euro was also boosted by market chatter that the European Central Bank (ECB) was buying Italian bonds.
"It's a classic short squeeze. The market was leaning on the fact that the euro should have been lower given the risk sentiment and the heavy sell-off in European equities," said Steven Butler, director of FX trading at Scotia Capital in Toronto.
He added that there was some decent buying from Eastern European names that further added to pressure on the euro's net short positions. That said, Butler thinks the sustainability of the euro's rally depends on how Wall Street performs.