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 Thursday, European leaders were preparing for the possibility of Greece leaving the euro zone to preserve the 12-year-old single currency.

Greece Prime Minister George Papandreou was told by French President Nicolas Sarkozy and German Chancellor Angela Merkel at a torrid meeting in Cannes that Athens would not receive a cent more in aid — Greece was due an 8 billion euros aid payment this month — until it votes to meet its commitments to the euro zone.

From news.yahoo.com:

In Athens, Greece’s powerful finance minister broke ranks with his prime minister, rejecting a proposed referendum on staying in the euro, hours after they received an ultimatum from France and Germany to make up their minds.

The growing chaos in Greece and uncertainty over the euro zone sent stocks and commodity prices lower in Asia, and fueled a rush into safe-haven German bonds.

On his return with Papandreou to Athens from Cannes, Finance Minister Evangelos Venizelos issued a defiant statement, saying Greece’s euro membership was a historic achievement and “cannot depend on a referendum”.

“Greece is something we can get over, something we can live without,” France’s Europe minister, Jean Leonetti told RTL radio in an interview.