LONDON: The euro slipped from one-month highs against the dollar after Standard & Poor's said a debt rollover plan being considered for Greece may put the country into selective default, though expectations for a second Greek bailout kept it underpinned.
The euro had hit a one-month high of $1.4580 earlier on Monday after a weekend decision by euro zone finance ministers to approve a 12 billion euro loan that Greece needed to avert immediate default, but the country still needs another rescue package expected to total around 120 billion euros.
Euro zone officials are working on how private creditors can be involved voluntarily, with French banks, major holders of Greek sovereign debt, putting in place proposals to rollover the bonds when they fall due.
S&P's latest salvo served as a reminder to investors that the common currency's recovery would be at best rocky.
"The French proposal is certainly raising a lot of interest in the market and the S&P's comment that it still constitutes a technical default does not really help the euro," said Audrey Childe-Freeman, EMEA head of currency strategy at JP Morgan Private Bank.
Aside from a relief rally after the Greek parliament approved austerity and reform measures last week, the euro has also drawn support from market expectations that the European Central Bank will raise interest rates at a policy meeting later this week.
The euro dropped from around $1.4550 to as low as $1.4510 immediately after the S&P comments.
It traded with slight losses at $1.4511 in afternoon dealing, having risen to $1.4580 on trading platform EBS, its highest since early June. Volumes were light with US markets shut for the Independence Day holiday.
"There is still a significant amount of uncertainty surrounding the euro and Greece but investors do believe that a second bailout will be announced. Market consensus seems to be that things will work out positively and the euro will do alright," said Raghav Subbarao, currency analyst at Barclays Capital.
The euro failed to make a sustained break above resistance at $1.4570, the 61.8 percent retracement of it's fall from a May 4 high of $1.4940 to its recent low of $1.3970 on May 23.
Traders cited offers from a major Asian sovereign account at $1.4580/90, protecting an option barrier at $1.4600. Technical traders saw support around the top of the hourly Ichimoku cloud at $1.4490, just under the day's low of $1.4496.
INVESTOR CAUTION
In the options market, euro/dollar risk reversals continue to come back in, with the one-month now trading around 2.05 in favour of euro puts, versus 2.15 on Friday. But investors remained cautious.
"Risk-reversals are trading quite negatively which shows investors are still concerned about a low probability, high-impact downside risk for the euro," said Subbarao.
The euro was off five-week highs of $1.2346 against the safe-haven Swiss franc. Traders said investors continued to unwind long positions built in the franc ahead of the Greek vote last week, while soft Swiss retail sales weighed on its currency.
The dollar index was flat at 74.333, not far from a near one-month low of 74.133. A slew of US economic data could sway sentiment this week, namely ADP private payrolls data on Wednesday and the US Labour Department's non-farm payrolls report on Friday.
US data has been mixed, lending little support to the greenback despite the Federal Reserve's $600 billion quantitative easing programme coming to an end on June 30. The end of the programme was expected to help the dollar, but the country's own fiscal problems have hampered it.
The Australian dollar fell 0.4 percent to $1.0725 after a surprise fall in Australian retail sales. The Reserve Bank of Australia is expected to keep rates on hold for the eight straight month on Tuesday at 4.75 percent.
Copyright Reuters, 2011
Comments
Comments are closed.