Euro drops as Greek referendum fans uncertainty

LONDON: The euro fell more than one percent versus the dollar and yen on Tuesday as investors cut exposure to the common currency after Greece's unexpected call for a referendum revived uncertainty over how the euro zone will solve its debt crisis.

If the Greek people use the referendum to reject the latest bailout deal it would put the next aid tranche to Greece in jeopardy, moving it towards the brink of disorderly default.

The outcome of a disorderly Greek default would raise the risk of further contagion and financial market instability globally.

Those concerns weighed on riskier assets across the board including commodities and equities, while safe haven German Bunds rose.

The dollar index was last trading up 1.4 percent at 77.213, while the euro slid more than 1 percent versus the greenback to $1.3674, triggering stops below $1.3680.

Traders cited Russian speculators and Swiss names selling the single currency in early European trade and said $1.3650, the Oct. 18 low, was a key support level.

The Australian dollar fell more than 1.8 percent to a low of US$1.0328 after the central bank cut interest rates to 4.5 percent, with interest rate futures suggesting investors were braced for further easing.

The dollar dipped slightly versus the yen, however, having pulled back from a three-month high as the impact of Japan's massive intervention on Monday faded a touch. It last traded down 0.1 percent at 78.10 yen , with market players wary of further yen selling by the Japanese authorities.

The single currency was also down 1.2 percent versus the yen at 107.00 , erasing some of the gains made during intervention.

"The Greek referendum is a real curve ball, nobody saw it coming and it injects a lot of uncertainty," said Steven Saywell, head of FX strategy at BNP Paribas.

"We had a lot of dollar buying yesterday from the Japanese Ministry of Finance which has added to the dollar bullish view as well as the setback in equity markets. These are all factors coming together to add to this risk-off sentiment."

Some analysts said investors would be wary of buying the dollar too aggressively given a two-day Federal Reserve meeting that concludes tomorrow and key US jobs data due on Friday. Any hints that the Fed is considering further monetary easing, or signs the economy is flagging, could drive the greenback lower.

INTERVENTION WATCH

Trading in dollar/yen steadied after Japan's yen-selling intervention on Monday, which major Japanese daily the Asahi newspaper said reached a record 10 trillion yen ($128 billion).

That was broadly in line with estimates among some market players of between $90 billion to $130 billion, and would exceed the roughly $59 billion in yen-selling intervention that Japan conducted in August.

Steve Barrow, strategist at Standard Bank, said if the intervention was not repeated dollar/yen could quickly return to the 75 yen region.

"We feel that the BOJ needs to vary the tactics here and would be better served by intervening intermittently in order to hang on to the gains it has made so far," he said.

"Even this tactic would not stop dollar/yen falling to our target of 70, but at least it might mean that this is a long-term possibility rather than a near-term probability."

The dollar briefly surged around 60 pips or so to an intraday high of 79.10 yen during Asian trading but quickly gave back its gains, and traders said the rise was unlikely to have been caused by intervention.

It backed off the three-month high of 79.55 yen hit on Monday but held well above levels seen before intervention of around 75.65 yen or so.

Many market players doubted that Japan would adopt a Swiss-style floor for dollar/yen given such a move was unlikely to be endorsed by the G20 or the G10. The G20 is meeting later this week in Cannes, France.

Copyright Reuters, 2011