* Euro gains on short-covering, stop loss buying
* Merkel does not rule out Greek debt haircut
* Euro vulnerable to flare up in "fiscal cliff" worries
By Nia Williams
LONDON, Dec 3 The euro hit a six-week high
against the dollar on Monday, with some investors trimming bets
against the single currency on signs Germany may be open to a
Greek debt write-down.
German Chancellor Angela Merkel said on Sunday Greece's
creditors may look at writing down more of its debt, a move that
would make the country's debt burden more easily sustainable.
The euro climbed to $1.3048, its highest since Oct.
23, before paring gains to last trade up 0.4 percent on the day
Traders said stop loss orders were triggered on the break of
$1.3030, and market players who had previously bet against the
euro were squaring their short positions as it moved higher.
There was talk of an options barrier at $1.3050 with some
traders expecting sellers around that level.
"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.
"But I still think we are in a market where the reflex is to
not really like the euro. 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."
The euro was helped by Spanish and Italian bond yields
falling as investors became more confident about buying euro
zone debt, and Greek bonds rallied after the announcement of
details of a debt buy-back.
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.
The final reading for the HSBC China Purchasing Managers'
Survey (PMI) rose to 50.5 in November from 49.5 in October,
suggesting the pace of manufacturing activity quickened for the
first time in 13 months.
Traders said short-covering in the euro was particularly
active against the Australian dollar, which was hit by below
forecast retail sales data and expectations that the Reserve
Bank of Australia will cut interest rates on Tuesday.
The euro rose more than 0.7 percent against the Aussie to
hit one-month high around A$1.2530.
The Aussie weakened 0.15 percent to $1.0414,
falling as low as $1.0393 at one point.
FISCAL CLIFF RISKS
Despite the euro recovering from falls after ratings agency
Moody's downgraded the euro zone rescue funds late on Friday
, the single currency looked vulnerable to
continuing concerns about how the euro zone will deal with its
debt crisis and worries about the U.S. "fiscal cliff".
The combination of U.S. government spending cuts and tax
rises is due to be implemented in early 2013 and may cut the
federal budget deficit but tip the economy back into recession.
Signs policymakers are struggling to reach an agreement to
avert that scenario could boost demand for the highly liquid
dollar, which is considered a safe haven currency.
"Resolution of the U.S. fiscal cliff still seems some way
off, and it is increasingly likely that a comprehensive
agreement will be delayed into the new year, meaning the economy
may go over the cliff in January only to be hauled back up again
soon after," said Simon Hayes, analyst at Barclays Capital.
The dollar fell 0.3 percent to 82.15 yen, retreating
from last month's peak of 82.84 yen.
The yen has been under pressure on expectations that a
likely change in Japan's government later this month would lead
to aggressive monetary easing.