Euro falls on EU stalemate, dollar gains

LONDON: The euro fell on Monday, hit by European policymakers failure to calm worries about a Greek default and the risk of the debt crisis engulfing larger euro zone economies and banks.

The euro was down 0.8 percent on the day to $1.3684 and against the yen to 105.08 yen as investors stepped up selling after an unproductive meeting of finance ministers in Poland.

A cancellation of a visit by Greek Prime Minister George Papandreou to the United States to chair an emergency meeting and a regional election defeat for Germany's chancellor Angela Merkel added to the growing sense of crisis.

The EU and IMF have presented the country with a list of 15 measures it needs to accelerate as a condition for disbursing a next tranche of bailout funds, Greek media said on Monday. .

Some players judged that would take the decision on the payment -- essential to avoid a default by Athens -- right down to the wire, a prospect that will hurt the euro in coming days.

"The weekend meeting of the EU produced nothing decisive and a lack of direction will raise questions about solvency," said Lena Komileva, senior vice president, foreign exchange at Brown Brother Harriman. "We expect the euro to retest the Sept 12 low of just below $1.35 in coming days."

The euro dipped briefly below its support level near $1.3664, the 61.8 percent retracement of last week's rally to $1.3937. It hit a seven-month trough of $1.34949 on trading platform EBS on Sept 12; on Monday, it fell as low as $1.3645.

The next Fibonacci support lies near $1.3599 the 76.4 percent retracement of the same rally, with more support at its Sept. 14 intraday low near $1.3590.

Data from the Commodity Futures Trading Commission showed speculators sharply increased their short positions in the euro, pushing the net total position to 54,459 contracts in the week ended Sept 13--the highest level since last June.

At the same time, speculators added to bullish bets on the US dollar for the first time since July 2010.

The greenback, which is often preferred at times of financial stress, has been helped by a renewed flight to safety, a jump in stock market volatility and expectations that the Federal Reserve will not resort to another round of quantitative easing.

FED MEETING AHEAD

The dollar rose broadly, edging up against the yen to 76.80 yen and climbing 0.6 percent versus the Swiss franc to 0.8806 . The dollar index was up 0.5 percent at 77.00, not far from its recent high of 77.784.

The Fed begins a two-day policy meeting on Tuesday amid talk it will take further monetary easing measures, such as lengthening the maturity of its debt holdings, an option market players refer to as "operation twist".

Although the market sees little chance that the Fed will adopt a fresh asset-buying programme this week, any signal that it will expand its balance sheet if data continues to disappoint could provide some support to risk appetite in coming weeks, said Robert Ryan, FX strategist at BNP Paribas, Singapore.

"However, if 'Operation Twist' is all we get, then I think the likelihood of risk appetite breaking down over the next few weeks is pretty high," Ryan said.

That could underpin the dollar in the short term.

Market talk that an Asian sovereign account sold the Australian dollar and the euro also helped push the greenback higher earlier in the session.

Commodity currencies came under pressure as stock markets were deep in the red with investors cutting back of leveraged trades. The Australian dollar was down 1 percent at $1.0251 while the New Zealand dollar was down 0.6 percent at $0.8231.

Copyright Reuters, 2011