Euro drops as Greece aid uncertainty weighs

NEW YORK: The euro slid against the safe-haven Swiss franc on Monday and could fall further if investors continue to shun risk on fears that Greece may not receive another round of financial aid and end up defaulting on its debt.

Euro zone finance ministers gave Greece two weeks from Monday to approve further spending cuts and tax rises in exchange for another 12 billion euros in emergency loans, piling pressure on Athens to get its ragged finances in order.

After two days of crisis talks, the ministers effectively issued Athens an ultimatum.

The euro hit a session low of 1.2015 francs, according to Reuters data, before paring losses to trade down 0.3 percent at 1.2102 francs late in the day. The dollar also rebounded from a low of 0.8403 francs and stood at 0.8464 francs late in the day, down 0.3 percent.

"The strength of the franc shows investors are very nervous right now and are skeptical about Greece getting aid," said Kathy Lien, director of currency research at GFT Forex in New York. "If they were truly optimistic we would not see the franc continue to remain strong."

"Renewed concerns about European sovereign debt issues have kept the Swiss franc well bid across the board," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington. "The Swiss franc also continues to benefit from a general weakness of the dollar and a broad flight to safety."

The euro was little changed against the dollar, recovering from losses that took it as low as $1.41910, well above a three-week low of $1.40730 hit on Thursday on trading platform EBS. It was last at $1.43020.

Traders said a move in the euro below $1.40730 would target the 200-week moving average around $1.40150.

A comment by Klaus Regling, chief of the European Financial Stability Facility, that the fund's guarantees will be raised to 780 billion euros from 440 billion, did lift the euro a bit, especially against the dollar and yen.

The euro earlier hit session highs at $1.43280 in the wake of comments from Regling.

There was also a sense of optimism in the market that the Greek parliament will likely pass the austerity plan and that Greece's prime minister, George Papandreou, will win a parliamentary vote of confidence in the new cabinet on Tuesday.

"An approval will likely be a near-term positive for the euro, but the broader picture is one where policymakers continue to kick the can down the road," Esiner said.

In addition, the reaction of Greek citizens in the streets could raise doubts about the implementation of austerity measures, he said, and drive down the euro.

"They are just delaying the inevitable, a restructuring of Greece's debt," he said. "This will result in a default, which in my opinion is not priced into the market."

GFT Forex's Lien said it will be difficult for the euro/dollar to make sustainable gains until there is more clarity about Greece's aid.

"I do not see a deal getting done until July," she said. "If an investor had to pick one week to reduce exposure to the euro this would be the week."

Risk reversals on euro/dollar options, which show strong demand for bets on the euro falling compared with bets on it rising, demonstrated the negative view investors have on the shared currency.

One-month risk reversals were trading around 2.7 percent in favor of euro puts, hovering near their highest level since the euro zone's debt problems reached crisis point in May-June 2010, according to data from interdealer broker ICAP.

One factor that may lend support to the euro in the near term, however, is the US Federal Reserve's two-day policy that begins on Tuesday, traders said.

The Fed is expected to restate its commitment to hold interest rates near zero for an extended period amid fresh signs the US recovery has lost momentum. It is likely to continue to reinvest proceeds from maturing bonds it holds to make sure its balance sheet does not shrink.

Copyright Reuters, 2011