Euro nudges up vs dollar but Greece still a wild card

NEW YORK: The euro edged slightly higher against the dollar on Tuesday as investors remained cautious on the single currency and as Greece's ability to avoid default was still a wild card.

The euro and dollar, however, both gained against the safe-haven Swiss franc on market talk that the Swiss National Bank was looking to lift its euro intervention target to 1.25 from 1.20 francs.

But traders downplayed the talk saying the euro is seen as vulnerable to renewed selling on any further signs that the bloc's debt crisis is worsening.

Later on Tuesday, Greece will resume a conference call begun on Monday with the "troika" of the European Union, European Central Bank and International Monetary Fund. News of its outcome is expected either afterward or on Wednesday.

"It is interesting that most of the news flow in the last few days has clearly been negative for the euro," said Mark McCormick, currency strategist at Brown Brothers Harriman in New York. "But any optimism that Greece will receive its next tranche of aid and remain solvent for the rest of the year should outweigh the negative news."

Also on Tuesday, the Federal Open Market Committee, the Federal Reserve's policymaking arm, opened a two-day meeting that is expected to end with a decision on Wednesday to stock up on longer-term Treasury notes in a bid to boost the fading economic recovery.

In midday New York trade, the euro was up 0.1 percent at $1.3702 after earlier falling to $1.3591.

The euro last week fell as low as $1.3495 -- its weakest since February. A break below that level could pave the way for a test of $1.3410, the 50-percent retracement of its rise from June 2010 to May 2011.

Against the Swiss franc, the euro was up 0.8 percent at 1.2156 francs, while the dollar was up 0.7 percent at 0.8876 franc.

Late on Monday, Standard & Poor's cut its sovereign rating for Italy by one notch, taking it three notches below the current rating of rival agency Moody's Investors Service.

S&P said Italy faces rising funding costs and could encounter unsuccessful bond auctions although any risk of default is "extremely remote."

"Given the debate over austerity measures and the massive debt-to-GDP ratio, S&P's decision was not shocking," said Jessica Hoversen, foreign exchange analyst at MF Global in New York. "We expect trade to remain quiet ahead of the FOMC, but still believe the dollar is a buy on dips."

German investor sentiment fell to its lowest level in three years while the International Monetary Fund said Europe and the United States could slip back into recession.

The Fed may leave the door open to a third round of quantitative easing, called QE3. Another round of QE would be negative for the dollar as it is tantamount to printing money and dilutes the value of the greenback.

A focus on tilting toward longer-term bonds in its portfolio is a move known as "Operation Twist."

"If the Fed opts for Operation Twist it would be neutral-to-positive for the dollar since it could stimulate the economy without flooding the market with more dollars," said BBH's McCormick.

The dollar was down 0.1 percent against the yen at 76.46. It was also down 0.1 percent against a currency basket at 77.046.

Copyright Reuters, 2011