Euro gains as market speculates on Greece

Views on a rescue emerged after news that European Central Bank President Jean-Claude Trichet is leaving a meeting of central bankers in Sydney early to attend a European Council meeting.

The European Union leaders are holding a special summit on the economy on February 11 in Brussels.

Investors cautiously waited to see what comes of the meeting as the bloc grapples with a debt crisis in Greece and budget concerns in other member sates.

"It is the system of the euro that market players are watching closely to see how it will work to solve a problem like that of Greece," said Hideaki Inoue, deputy general manager of forex trading at Mitsubishi UFJ Trust Bank.

But market activity stayed mostly subdued in Asian trade as investors were unwilling to place big bets due to concerns about sovereign credit risks in the euro zone, traders said.

"It still looks like there's strong downside power against the euro," said Akira Hoshino, chief manager in the foreign exchange trading department at Bank of Tokyo-Mitsubishi UFJ.

"But any positive news for the euro from the EU summit would give the currency a chance to rebound to some degree," he said.

The euro rose 0.4 percent from late U.S. trading on Monday to $1.3706. Last week it fell to $1.3585 on trading platform EBS, its lowest since May 2009.

The euro climbed 0.7 percent against the yen to 122.66 yen, recovering from 120.70 yen on Friday, its lowest in about a year.

Greek civil servants threatened on Monday to stage more strikes in protest at government austerity measures, further fuelling market concerns over fiscally fragile euro zone members and weighing on the single currency and bonds.

Tokyo traders said it would not be easy for Greece to reduce its budget deficit and other risk factors would also likely keep investors cautious.

Other events expected this week include congressional testimony on Wednesday by Federal Reserve Chairman Ben Bernanke.

Bernanke will speak about unwinding of emergency Fed liquidity programmes and implications for the economic recovery.

Also, traders said market players are wary that China may take a further tightening step before a week-long holiday next week.

The dollar index, a measure of its performance against six major currencies, slipped 0.2 percent to 80.164 <.DXY>.

The greenback was up 0.2 percent against the yen at 89.46 yen.

Among higher-yielding currencies, the Australian dollar was trading around $0.8696, up 0.6 percent on the day and off a five-month low of $0.8578 touched last week.

The New Zealand dollar was at $0.6882, up 0.8 percent on the day.

(Additional reporting by Kaori Kaneko; Editing by Michael Watson)