FOREX-Euro takes breather after EU deal rally

The euro dipped on Monday, giving up a bit of ground after its biggest one-day rally in eight months, as investors looked for fresh reasons to extend a rally sparked by initial euphoria over the latest European push to ease the region's debt crisis.

Markets cheered after euro zone leaders agreed on Friday to let their rescue fund inject aid directly into stricken banks from next year and intervene on bond markets to support troubled members.

The EU leaders also took a step towards banking union by pledging to create a single banking supervisor.

The European summit agreement triggered a rally in Spanish and Italian government bonds and sent the euro soaring some 1.7 percent on Friday, its biggest one-day percentage gain since last October.

While some market players said the euro's rally may continue for a while longer, others questioned its sustainability.

"I wouldn't be surprised really for some of the gains to be given back," said Gareth Berry, associate director of G10 FX strategy for UBS in Singapore. He added that UBS remains bearish on the euro and expects it to end the year at $1.15.

The euro fell 0.3 percent to $1.2621, down from a one-week high of $1.2693 hit on trading platform EBS on Friday.

Berry at UBS cautioned against reading too much into the euro zone bond market's reaction on Friday, when the yield gap between Spanish and German bond yields narrowed sharply.

"It's worth mentioning that most of that came through on very low volumes. We saw very little flow, so there's not a lot of conviction, I think, behind this," Berry said.

The single currency slipped 0.3 percent against the yen to 100.69 yen. On Friday the euro had jumped 2.2 percent versus the yen, its biggest one-day rise since March 2011.

"The last two weekends' attempts at providing (market) support -- Greek elections, EFSF funding for Spanish banks -- bought less than a day's worth of rally in risk assets," analysts at JPMorgan noted.