Euro down vs dollar as Greece outlook spurs caution

NEW YORK: The euro edged slightly lower against the dollar on Tuesday as investors turned wary on the single currency after a downgrade of Italy's debt and amid uncertainty about Greece's ability to avoid default.

The euro and dollar, however, both smartly outperformed 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. Traders, though, downplayed the speculation.

The euro is vulnerable to renewed selling on any further signs that the bloc's debt crisis is worsening.

"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."

Standard & Poor's cut its sovereign rating for Italy by one notch, taking it three notches below Moody's current rating.

Spain, meanwhile, was said to have held a lackluster bond auction, traders said.

German investors 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.

Greece, on the other hand, fully paid two bond coupons amounting to 769 million euros.

The euro was last down 0.1 percent at $1.3670, paring losses from an earlier fall to $1.3591. Traders cited Middle Eastern demand and said bids from macro funds would provide support around $1.3650-60.

Against the Swiss franc, however, the euro was up 0.7 percent at 1.2150 francs, while the dollar was up 0.9 percent at 0.8894 francs.

Big gains for the euro are unlikely given that investors continue to price in the possibility of a Greek default as Athens waits to see if it can clinch a deal for more bailout funds.

"Any news that brings Greece closer to bankruptcy or a debt restructuring will put the euro under more downside pressure. I wouldn't be surprised to see a test of $1.35 in the next week," said Niels Christensen, currency strategist at Nordea in Copenhagen.

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

After a two-day meeting, the US central bank on Wednesday is expected to announce more monetary stimulus to kick-start economic recovery and 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.

The Fed may focus on tilting towards longer duration bonds in its portfolio, 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 flat versus a currency basket and against the yen at 76.58 yen.

Copyright Reuters, 2011