NEW YORK: The euro retreated against the dollar and yen on Monday but remained within reach of recent highs as investors hoped for deals to restart emergency aid to Greece and to head off a US fiscal crisis.
Germany's finance minister said he expected a deal later on Monday that would unfreeze aid for Greece, the 17-country euro zone's most heavily indebted member.
Finance ministers and the International Monetary Fund began their third attempt in as many weeks to disburse the funds, which has been delayed by disagreement over how to reduce the country's large debt load.
Traders said concern about whether US lawmakers would reach a deal of their own to avoid $600 billion of tax hikes and spending cuts in 2013 also limited risk appetite and encouraged profit-taking after several days of euro gains.
That pushed the euro down 0.1 percent to $1.2960, about 30 cents off a one-month high hit last week. It fell 0.4 percent to 106.45 yen after hitting a seven-month high above 107 yen overnight.
But traders also said the market expected Greece would ultimately get its money and was cautiously optimistic that the US economy would not plunge over the "fiscal cliff" in January.
"It's hard to be completely hedged and wedged. You have to take a view, and our view is more on the positive side: we think things will get resolved" with Greece and the so-called US fiscal cliff, said Adnan Akant, head of foreign exchange at Fischer Francis Trees & Watts.
The dollar was also weaker against the yen, slipping 0.3 percent to 82.13 yen. Traders said s ome investors u nwound bets in favor of the greenback bu ilt up in recent weeks.
The Japanese currency has been under pressure in recent weeks on mounting speculation that a new government after next month's general elections will force the Bank of Japan to ease monetary policy aggressively.
RISK REVIVAL AHEAD?
HSBC currency strategist Daragh Maher said the slight euro selling was no surprise after its recent gains. "I don't think there is any conviction" behind it, he said, adding the currency should rise if a Greece deal is reached.
In fact, a Greek deal and a US fiscal agreement would likely boost risk appetite altogether, which should lift the Australian and New Zealand dollars, Akant said.
Expectations of a deal for Greece overshadowed an election victory for separatists in the Spanish region of Catalonia on Sunday.
"The euro should end the year at $1.33, but we are still in a back-and-forth market and many factors need to be resolved for that forecast to hold," said BNP Paribas currency strategist Vassili Serebriakov.
"Some of those factors include Greece receiving more aid, 'fiscal cliff' issues being avoided or postponed and if the Federal Reserve announces plans next month to expand its balance sheet," he said.
More Fed easing would weigh on the dollar as it would amount to flooding the financial system with more greenbacks and would cement Fed pledges to keep interest rates at zero into 2015.