LONDON: The euro pared losses in volatile trade on Tuesday on a media report, later denied, that heavily indebted Greece could agree a new rescue deal next month to help it meet its funding requirements in the next two years.
The euro rose around half a cent to trade as high as $1.4376 after Dow Jones quoted a senior Greek official as saying that a new deal could be struck as early as June.
It later fell back after Greece denied it was discussing a new package and a German MP questioned whether Greece had met the terms for its next aid tranche, and was last trading around $1.4330, a touch softer on the day. Traders said a semi-official name was seen selling around the day's highs.
‘This seems a bit early to come up with something concrete. I think we'll get more posturing before a deal can be agreed on Greece,’ said Gavin Friend, currency strategist at nabCapital.
Greece must follow the steps laid down in its budget adjustment programme before any additional loans can be considered, European Central Bank Executive Board member Lorenzo Bini Smaghi said on Tuesday.
Asked about the possibility of a new loan being extended to Greece, Bini Smaghi said the Athens government had to press on with what had already been agreed.
‘Our view is that policy makers will probably not want to derail the European banking industry in the midst of stress tests, and further Greek aid will probably be forthcoming,’ said Chris Turner, head of fx strategy at ING in a note.
‘However, the euro may stay on the soft side running into next week's EcoFin meeting,’ he added.
On Monday, Standard and Poor's cut Greece's rating to B from BB-, dragging it further into junk territory, saying its projections suggest that debt reductions, or haircuts, of between 50 and 70 percent of the bonds' original value could be needed to make Greece's debt burden sustainable.
Coupled with a media report last week -- later emphatically denied by European policymakers -- that Greece may be considering exiting the euro, it highlighted the dilemma of how best to extricate the country from its debt quagmire, pushing the euro to a three-week low of $1.4254 on Monday. PROFIT TAKING Traders said macro accounts had started to take profit on their euro short positions, with others market players also thinking selling was becoming overdone in the near term after the euro fell from a 17-month high of $1.4939 hit last week.
‘We need a fresh trigger to go lower in the euro from here. I think we're in a $1.43/1.46 range for now,’ said Geoffrey Yu, currency strategist at UBS.
The euro's 55-day moving average, now at $1.4246, is seen as major support. But a break there could put it on course to test support around $1.4150 -- near its April 18 low of $1.4156 -- and a 38.2 percent retracement of the euro's rise, around $1.4145.
Recent weakness in the euro, initially triggered by disappointment over a lack of hints on a rate hike next month from the European Central bank last week, accelerated as panic selling in the commodities market prompted investors to shun risk.
Because rising oil and commodities have been at the root of inflation that has pushed the European Central Bank to tighten policy, declines in oil prices could make investors scale back their expectations of ECB rate hikes.
The euro was up around 0.3 percent against the yen at 115.84 yen after sliding to a 6-week low in Asian dealing around 114.76. The dollar rose 0.6 percent to 80.76 yen, well above a seven-week trough of 79.57 yen hit last week. The Swiss franc fell to session lows against the dollar and the euro after data showed Swiss CPI inflation rose 0.1 percent month-on-month in April, well below forecasts for a 0.6 percent rise, denting the chances of a rate hike from the Swiss National Bank in June.
The dollar gained more than 50 pips to 0.8804 francs, its strongest in nearly two weeks. The greenback was steady versus a currency basket at 74.722.
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