On Tuesday, the single currency euro held its ground early in Asia, having been squeezed higher overnight as the market pared extremely bearish bets against it ahead of key events in Europe this week.

After bouncing off a 6-month trough at $1.2666, the euro stood at $1.2767 and traders said buying ahead of a $1.2650 option barrier had prompted some short covering. The euro was also nearing strong support seen just below $1.2600.

After a holiday on Monday, trading activity in Asia is likely to pick up as Tokyo reopens and investors will also have the December trade figures of China to chew on. The Chinese report is expected to show export growth slowing to 13.5 percent, the weakest in two years.

The short covering of Monday helped the euro rise against other currencies; the single currency popped above 98.00 yen from an 11-year trough of 97.28 yen and stood at A$1.2467, off a record low around A$1.2408 set last Friday.

On Saturday, the head of one of Angela Merkel’s coalition partners said the European Union would be fine if a country dropped the currency.

In an interview with Deutschlandfunk radio, Horst Seehofer, leader of the conservative Christian Social Union (CSU), said he did not agree with Merkel’s statement “If the euro fails, Europe fails.”

“There are many healthy economies in Europe that do not have the euro, and Europe works nonetheless,” he said in a transcript of the interview. “Great Britain is an example.” “I am not proposing it, but if Greece did leave, it would not bring damage and destruction to European integration,” he said.

On Wednesday, the euro hit an 11-month low against the dollar and stocks eased after the Federal Reserve issued a warning that the sovereign debt crisis of Europe could hurt the U.S. economy but failed to signal fresh action to stimulate growth.

Euro/dollar slumped to its lowest level since January at $1.3005.

“If we get a further deterioration of the euro zone debt crisis, if we see a lot of countries being downgraded, or more problems in the banking sector, this $1.30 is not going to hold,” said Arne Lohmann Rasmussen, chief analyst at Danske in Copenhagen.

The dollar index .DXY that tracks the dollar’s value against a basket of currencies rose as high as 80.407.