NEW YORK (Reuters) - The euro rallied against the dollar and the yen on Monday as euro zone peripheral bond yields eased on optimism European authorities will yet keep the euro zone intact though concerns over Spain's ailing banking sector and global growth capped gains.
Grim U.S. jobs data on Friday added to risk aversion globally on fears of a worldwide slowdown but comments from European Central Bank policymaker Ewald Nowotny saying he supported the idea of a European banking union pushed the euro above of the day's ranges.
"The ideas for this are certainly correct, but you cannot be misled. We need significant time to implement (this)," Nowotny told a financial services convention, according to the Austria Press Agency.
Markets had already been speculating there could be some new plan or action to work through the euro zone debt crisis and keep Greece in the euro zone before Nowotny's comments reached investors.
More insight on potential monetary easing may come from Wednesday's European Central Bank meeting, with markets positioning for an outside chance of a rate cut. Factory prices held steady in the euro zone in April, giving the ECB some room to cut rates.
"The outlook of the euro will depend on how ready and willing the European Central Bank's is to provide stimulus to the European economy," said Kathy Lien, director of currency research at GFT in Jersey City. "They (the ECB) have made it clear that they want the solution to come from Europe's leaders but the recent deterioration in economic data and slide in asset prices makes easier monetary policy inevitable."
The euro was 0.4 percent higher at $1.2479, moving up from the low touched on Friday, its lowest since July 2010. Traders cited large bids at $1.2370-80, while offers from funds to sell were layered above $1.2450. Trade had been thin until New York opened with London markets closed.
The euro was 0.6 percent higher at 97.55 yen staying above Friday's 11-1/2-year low of 95.57 yen, using Reuters data.
On Thursday, Federal Reserve Chairman Ben Bernanke testifies before a congressional committee about the U.S. economy and may offer more clues to possible policy stance. The weak U.S. labor market has raised expectations of more Fed quantitative easing by some analysts.
"While expectations of more QE by the Fed may help the euro, with no quick decision about Spain in sight, the pressure on it will remain," said Beat Siegenthaler, currency analyst at UBS in Zurich.
The euro's sell-off intensified last week after Spain's borrowing costs spiked on worries it may need to issue more bonds to bolster its ailing banks, putting more stress on markets already concerned that Greece may exit the euro zone.
Spanish and Italian bond yields eased on Monday, but with no credible and long-lasting policy response expected, borrowing costs are likely to stay elevated. <GVD/EUR>
Spanish Prime Minister Mariano Rajoy called on Saturday for the establishment of a central authority to oversee fiscal policy in the euro zone. Germany also wants a big leap forward in euro integration, but investors are doubtful whether such moves will restore confidence in the near term.
Commerzbank analyst Ulrich Leuchtmann in London said policymakers will have to react fast as the crisis reaches a tipping point.
"In the end the politicians and/or the ECB will react, taking some pressure off the euro," Leuchtmann wrote. "Medium term, euro/dollar will trend downwards as the crisis will not be solved but only contained once again."
Commerzbank revised down its euro/dollar forecast, to $1.21 at the end of June at $1.21 from $1.32 earlier.
Market players saw few reasons to buy the single currency, though there could be bouts of short-covering. Short positions in the euro surged to the highest on record, the Commodity Futures Trading Commission said. <IMM/FX>
The dollar rose 0.2 percent to 78.18 yen, off Friday's trough of 77.65, its lowest since mid-February. The currency pair has been volatile on fears of yen-selling intervention by the Japanese authorities, a factor which will keep investors edgy.
Expectations of more easing by the Bank of England also kept a lid on the British pound. Sterling was 0.3 percent higher at $1.5405, with some investors looking to sell into a bounce before a BoE policy decision on Thursday.
Reporting By Nick Olivari; Editing by Theodore d'Afflisio