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After trading higher for days, the euro

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[EUR=X  Loading...      ()   ] is giving up ground. Instead of focusing on potential interest rate hikes, traders are looking ahead to the upcoming eurozone leaders' meeting and the stubborn sovereign debt crisis.

Euro fatigue, anyone?  

Currency traders have been paying close attention to interest-rate policy around the globe, and trading based on where they think the hawks are nesting. In recent days that has helped the euro, especially after European Central Bank President Jean-Claude Trichet hinted last week that rates might rise there as soon as April. The euro rose to more than $1.40 against the dollar on Monday before settling slightly lower.

But Monday also brought a ratings downgrade for Greece from Moody's. Traders shook that off initially, but Greek 10-year bond yields did hit a 10-year high Tuesday - quite a measure of the country's fiscal problems, and of the fact that European leaders have yet to come up with anything resembling a viable solution to the sovereign debt crisis.

Meanwhile, a think tank report published Tuesday suggested that the Federal Reserve may start pulling back on its monetary stimulus measures sooner than widely expected. The report, from Medley, has put some muscle in the dollar, and is also making European rate-hike prospects somewhat less exciting in comparison. 

Then there are all those traders with really big short positions against the dollar. "It doesn't surprise me to see some profit taking on short positions, especially when you see news reports that markets may not get everything they want from the summit," Paresh Upadhyaya, head of Americas G10 FX Strategy at BofA Merrill Lynch Global Research, told me.

David Forrester, an FX strategist at Barclays Capital, hinted at euro fatigue in a recent interview with CNBC. "We have to be a little bit careful" around the euro, he said, adding that "We would be a little bit wary of getting long the euro" at current levels. You can hear him here, starting at 2:45.

Jonathan Cavenagh, senior FX strategist at Westpac Bank, is slightly more bullish near term, provided the outlook for oil prices doesn't change dramatically. But he is also cautious about the euro's prospects in the second half of the year. Take a listen here.

Absent major crises, traders have spent a lot of time this year searching for interest rate moves that will lift currencies. But with the eurozone's problems rising to the fore again, fundamental factors are pushing into view once more. Ignoring them could be painful.

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