(Reuters) - The euro held huge gains in Asia on Tuesday after hopes for a new EU debt plan sparked a correction in a deeply bearish market, though sentiment remains fragile as European leaders have disappointed many times before.
The euro rose three cents to a peak of $1.3698 on Monday, its biggest daily gain versus the U.S. dollar in 15 months. It last traded at $1.3627. It also flew to 104.99 yen, the highest in three weeks, showing a rise of 1.65 percent, before steadying at 104.46.
The rally followed an Franco-German pledge on Sunday that they would do what is necessary to shore up banks, settle the Greek crisis and help growth in Europe.
Commodities, stocks and high yielding currencies joined the "risk on" wave with copper close to 13 percent higher in just one week. The Australian dollar enjoyed the biggest one-day rally in over a year, surging 2.3 percent after briefly touching parity at $1.0016. It was last at $0.9980.
The revival in risk flushed out long positions in the U.S. dollar across the board, including the Swissy. It collapsed 2.5 percent to 0.9032 francs. The dollar index fell sharply to near three-week lows at 77.561, down 1.48 percent.
Major resistance for the euro is found at $1.3680-90, the 38.2 percent Fibonacci retracement of the $1.4550/$1.3145 move and the September 28 trend high. A clear break above $1.3700 targets $1.3845.
Dealers were surprised by the scale of the reaction given EU leaders have disappointed many times before.
"Unfortunately, Europe has a history of delivering far too little far too late," said Robert Rennie, chief currency strategist at Westpac.
"Europe doesn't have the political will, the cohesion and the sense of what needs to be done."
He said the rally was temporary and would be looking to sell the euro into strength which means in the $1.365-$1.385 range.
Investors were looking for an excuse to price out bad news that have been gripping markets since September. While there is little doubt the problems in Europe will resurface at some stage, recent economic data was better than feared, countering the danger of a global recession.
Traders will focus on voting in Slovakia on Tuesday, the only country among the bloc's 17 members that has yet to ratify changes to the euro zone's 440-billion-euro bailout fund. Any delay on passing the legislation could affect sentiment toward the euro. Malta gave its backing earlier on the day.
The dollar remained stuck at 76.65 yen, within the tight 77.29-76.09 range of the past month.
UK industrial production and minutes of the FOMC meeting will be released later on Tuesday.
This week's focus will be on key China data with trade and CPI due Thursday and Friday. Strong trade numbers and a lower CPI would be the best combination to ease concerns of a hard landing and boost risk sentiment.