Euro falls on EU stalemate, risk assets wobble

NEW YORK: The euro fell on Monday after European officials ended a meeting without agreeing on new ways to tackle the region's debt crisis, stoking fears a possible Greek default would hurt larger economies and European banks.

The euro shed more than 1 percent to $1.3610 and traders braced for a move to last week's seven-month low of $1.3495. European shares also snapped a four-day winning streak after international lenders said Greece must shrink the public sector and improve tax collection to secure a vital 8 billion euro rescue payment next month.

"The ball is in the Greek court," said Bob Traa, the International Monetary Fund representative to Greece. The nation's finance minister will speak with senior IMF and European Union officials later Monday.

Markets feared Greece may default without the payment, the next installment of a bailout package adopted last year.

With nothing new coming from a meeting of European finance ministers in Poland over the weekend, "the market is bracing itself for the worst possible outcome, which is a disorderly Greek default," said Stephen Gallo, head of market analysis at Schneider Foreign Exchange in London.

"If Greece defaults without a plan in place to deal with it," he said, "then you don't want to be owning the euro."

The euro lost 1.2 percent against the dollar and 1.3 percent against the yen, falling to 104.60 yen. The dollar fell 0.1 percent at 76.69 yen.

A regional election defeat for German Chancellor Angela Merkel added to the growing sense of gloom about the single currency. Merkel has been under fire for her hesitant leadership in the euro zone crisis. Election setbacks could threaten the stability of her government.

Fear that a euro zone crisis would hurt global growth also battered high-yielding growth-sensitive currencies such as the Australian dollar, which shed 1.4 percent to $1.0218.

FED MEETING AHEAD

Also on currency investors' radar is this week's two-day US Federal Reserve meeting, which will start on Tuesday.

Markets expected the Fed to try to push long-term rates lower by selling some short-dated bonds in its portfolio and buying longer-dated ones. Investors have referred to the policy as "Operation Twist."

Investors said such a move has been largely priced in by the bond market, where the 10-year yield is hovering below 2 percent, and would not have much impact on the dollar.

But if incoming US economic data continued to disappoint and the Fed institutes new asset purchases in the future, all bets are off.

"If they resort down the road to new purchases, then I think you'd get a renewed bout of dollar weakness," said Paresh Upadhyaya, senior currency strategist at Bank of America Merrill Lynch.

He said the main focus would likely stay on Europe this week, especially as worries mounted that Italy, the euro zone's third largest economy, may also have trouble servicing its large debt burden.

Moody's put Italy on review for a possible downgrade in June and said last week it would conclude the review within a month. Italy's debt-to-output ratio is about 120 percent, second only to Greece, and its borrowing costs are rising.

"Most investors expect Greece will default. It's just a matter of whether it will be orderly or not and of timing. Will it be the fourth quarter or next year," Upadhyaya said. "But people are more fearful about Italy."

Recent data showed speculators sharply increased bets against the euro in the week to Sept. 13, pushing the net short position to its the highest level since last June.

Copyright Reuters, 2011