NEW YORK: The euro rose against the dollar on Tuesday, supported by expectations a Greek debt restructuring deal could be close, while a resurgent yen raised concern Japanese authorities could intervene to weaken it.
The dollar fell to its lowest against the yen since the last intervention in October, under pressure after the US Federal Reserve said last week it was likely to keep interest rates near zero until late 2014.
The euro got a lift after Greek Prime Minister Lucas Papademos said negotiators had made "significant progress" in talks to strike a restructuring deal on government debt, with the aim of a definitive agreement by the end of this week.
But many investors said gains were likely to be tempered as worries mounted that Portugal could follow Greece in needing a second bailout and debt restructuring. Those concerns persisted despite European Union leaders reaching an agreement on the introduction of a permanent euro zone financial bailout mechanism, with details to be worked out at a later date.
"Headline risk will remain ongoing given that Greek debt talks are unresolved, though yesterday's constructive EU leaders' summit should help provide support over the medium term," said Eric Theoret, currency strategist at Scotiabank in Toronto.
The euro faces resistance at that level and around the 38.2 percent retracement of its Oct-Jan slide, around $1.3235 using Reuters calculations.
Apart from the Fed keeping the door open for more quantitative easing, expectations are rising that the European Central Bank could pump in huge amount of funds through the next long-term refinancing operation (LTRO) to be held in February.
"This (risk rally) is related to the dovish Fed statement and their pledge to keep policy rates on hold for longer. The Aussie has really rallied against the euro and dollar," said Giovanni Staunovo, strategist at UBS Wealth Management Research in London.
"Euro/dollar is also driven by the news that banks at the next LTRO from the ECB will demand more liquidity."
INTERVENTION JITTERS
The dollar hit a three-month low of 76.14, using Reuters data, well off last week's peak of 78.28. The dollar was last trading up 0.1 percent on the day at 76.37 yen, with traders citing talk of dollar bids down towards 76.00 yen and stop-loss dollar offers below 75.80 yen.
Japanese Finance Minister Jun Azumi vowed firm steps against excess volatility and speculative moves in the foreign exchange market to curb any renewed rises in the yen.
A Reuters poll showed Japanese fund managers were keen to return funds to Japan as they saw Tokyo shares relatively undervalued while they cut their North American stock weightings. As such, not many expect yen-selling intervention, although market wariness is likely to rise if the dollar drops down to around 75 yen.
Dollar/yen implied vols rose as markets priced in possible turbulence. One-month traded around 7.7 percent versus 7.25 on Monday, with one-year vols at 10.90 percent versus 10.70.
Traders were also watching for any moves from the Swiss National Bank as the euro traded close to the 1.20 franc floor in euro/Swiss that policymakers have pledged to defend. The euro was last down 0.1 percent at 1.2043 francs, according to Reuters data.
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