Euro slips on caution over Slovak vote, Greece aid

NEW YORK: The euro fell on Tuesday on caution ahead of a Slovak vote on changes to the euro zone's financial rescue fund and word on whether Greece will receive its next round of a loan to avert a debt default.

In other developments, the US Senate is set to vote on Tuesday on a trade bill aimed at pressuring China to allow its yuan currency to appreciate further against the dollar.

Slovakia is the last of the euro zone's 17 members to decide on changes to the 440-billion-euro European Financial Stability Facility. Its lawmakers began debate on the issue and its finance minister said the country is expected to approve the changes this week.

News of a split within the Slovak ruling coalition caused some jitters over the outcome of the vote, spurring profit-taking on the euro a day after it recorded its biggest gain in 15 months.

The European Union, IMF and European Central Bank -- known as the "troika" -- said an eight billion euros loan tranche to Greece should be paid in early November, but they warned Athens had made only patchy progress in meeting the terms of a bailout agreed in May last year.

"Some of the latest developments from Europe are prompting a bit of profit-taking in the euro. The overall expectation is that they will pass it," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

The euro was down 0.45 percent at $1.3583 after jumping 2 percent on Monday to a near three-week high of $1.3698.

Monday's rally followed a Franco-German pledge that they would do what was required to shore up banks, settle the Greek crisis and accelerate economic coordination in the euro zone.

Analysts said the euro could still rise in the near term given a recent build-up in short euro positions.

"The euro can go higher because short positioning is still extreme. Monday's rally only partially offset that position." said Manuel Oliveri, currency strategist at UBS in Zurich.

Data from the US Commodity Futures Trading Commission shows currency speculators increased their net short positions in the euro to 82,697 contracts in the week ended Oct. 4, the biggest in four months.

A lasting euro rally was still unlikely, however, given uncertainty over the details of European policymakers' plans to recapitalize banks in the face of expectations that Greece could default on its debts, keeping investors wary of establishing outright long positions in the common currency.

"I am still skeptical that a comprehensive plan will be really in place by early November," said Commonwealth's Esiner. "The key risk is that Greece is insolvent and will likely default on its debt."

Risk-reversals, a measure of the premium required to hold a put or a call in a currency, show investors hedging against a fall in the euro. The one-month 25-delta risk-reversal traded around 2.55 for euro puts, compared to 2.80 at the end of last week.

DOLLAR FIRM

While developments in Europe remain a key driver, a drop in fears about a new US recession after last week's less-grim-than-expected payrolls report has helped the dollar.

The greenback held steady at 76.69 yen, not far from a record low near 75.94 yen set in August.

The dollar was up 0.68 percent against the Swiss franc at 0.9098 franc after falling more than 2 percent on Monday when the US currency came under heavy selling pressure as equity markets rose and appetite for risk improved on optimism over the euro crisis.

The dollar was up 0.5 percent against a basket of currencies at 77.88.

Ahead of the Senate vote on the China trade bill, spot yuan last traded at 6.3750 against the dollar, slightly weaker than 6.3486 at the close on Tuesday, when it strengthened 0.59 percent in its biggest daily rise since its 2.1 percent revaluation in July 2005. It has now appreciated 30.3 percent since then, including the revaluation.

Copyright Reuters, 2011