The euro fell for a third straight day on Friday, with more losses viewed as likely in the upcoming week, weighed down by wranglings about how to handle Greece's debt crisis and diminished expectations about euro zone rate hikes. The uncertainty should continue next week, analysts said, with a consensus agreement unlikely to be reached next week before a June 20 euro zone finance ministers' meeting to discuss ways to secure more funding for Greece.
--- Euro posts worst one-day loss vs dollar in a month
--- Greek tensions to persist as European officials disagree
--- Dollar index has best week since mid-May
That was a pre-condition for disbursement of the next tranche of its current bailout in July. "Tension in the European periphery is again rising and has potential to feed into a higher risk premium on the euro in coming weeks, as we enter a critical phase around securing a more long-term solution for Greece," said Jens Nordvig, head of G10 FX research at Nomura Securities in New York. The euro posted its worst daily performance in a month on Friday and was down around 1.9 percent for the week, its weakest showing since mid-May.
The single euro zone currency fell as low as $1.43220 on trading platform EBS and was last at $1.43460, down 1.1 percent on the day. Euro net long positions more than doubled to 51,836 contracts in the latest week, suggesting elevated positioning that could result in a corrective pullback for the single euro zone currency.
Against the yen, the euro fell as low as 114.940, its lowest since May 27. It last traded at 115.235, down about 1.2 percent on the day. Greece's bond yields rose 60 basis points, with the short end of the curve leading the sell-off. Reuters calculations from Markit show 5-year credit default swaps reflect a 74 percent default probability based on a 41 percent recovery rate.
A broad-based flight to safety stemming from worries about the global economic recovery also dragged down the euro and other currencies that typically rise in times of increased risk appetite. Greece added to the markets' aversion to risk as investors received mixed messages about the progress of financial assistance to the debt-ridden country.
Germany stuck to its demand that private investors contribute to a second bailout, even as the European Central Bank was opposed to any form of debt restructuring. ECB President Jean-Claude Trichet again indicated on Thursday the bank would not roll over its own Greek bond holdings.
Trichet's statement has huge implications for Greece's outlook. David Gilmore, a partner at FX Analytics, in Essex, Connecticut said if the restructuring or aid plan under discussion happens and the ECB does not roll over maturing Greek bonds, "the deal is dead in the water and Greece insolvency happens sooner than later, Greek bank run accelerates and contagion starts."
"Seems like a slow motion Lehman event is again unfolding in the euro zone, and policy response is not going to get in front of the problem ... Helmets are mandatory next week despite the hot weather," said FX Analytics' Gilmore. Aside from the Greek drama, reduced rate expectations also hurt the euro.
The ECB on Thursday kept its 2012 inflation forecast unchanged, suggesting the pace of euro-zone interest-rate hikes may be slower than previously thought. Trichet cemented the market's view that the ECB will raise rates in July, but another hike is not priced into the market until early 2012.
The ICE dollar index, which tracks the greenback against a basket of currencies, rose 0.9 percent to 74.844 and was up 1.5 percent this week, it strongest performance since mid-May. Next week's batch of US data will focus on evidence that core inflation is still quite tame, which should reinforce the Federal Reserve's resolve to hold rates steady for a long time.
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