NEW YORK: The euro slid from a two-week high against the US dollar on Friday as investors locked in profits from this week's rally, wary about the outcome of Greek debt negotiations although there were growing expectations of a deal.
An initial agreement between Greece and its private creditors to reduce the country's huge debt load could come as soon as late Friday, sources familiar with the talks said. Any supposed agreement will be followed by technical talks over the weekend.
In midday trading, the euro was down 0.2 percent at $1.29380, falling from a peak of $1.29866 on trading platfrom EBS, when it stopped just shy of the key $1.30 level. However, it remained well above last week's 17-month low of $1.26240.
So far this week the euro has risen more than 2 percent, posting gains after three weeks of losses and putting it on track for the biggest weekly advance since mid-October after solid bond auctions in Spain and France on Thursday boosted investors' risk appetite.
Analysts said it was normal to see profit-taking after such a strong rally and the euro was likely to stay supported in the short term as investors await word on the Greek debt talks.
"Over the past few days, the market has taken a more optimistic view of events. The hopes of a Greek agreement have helped as has better economic data and a more positive, maybe even coordinated, spin by recent European Central Bank speakers," said Ken Dickson investment director, at Standard Life Investments, in Edinburgh.
Standard Life has assets under management of $233 billion.
"In the near term, it is likely that short positions will be squeezed a little further, given that market expectations were very pessimistic before the year-end," he added.
A positive outcome to the Greek talks is expected to boost the euro, although investors would remain wary about the risks of the region's debt crisis deteriorating further. Any negative news could see investors re-establish bearish bets.
"We continue to hold on to downside exposure in euro/dollar ... but at this point, we are looking more for a gradual structural weakening move than an imminent collapse," said Jens Nordvig, head of global currency strategy at Nomura Securities in New York.
He added that Nomura is not ruling out further gains in the euro before the downtrend in the currency pair resumes. "Hence, we are staying away from short euro/dollar spot positions for the time being."
Against the yen, the euro was down 0.4 percent at 99.650, off an earlier three-week high of 100.330 yen, but still comfortably above an 11-year low of 97.040 yen hit on Jan. 16.
The euro has gained more than 2 percent against the yen this week, and was on track for its largest weekly advance since October.
Investors stacked up bets against the euro after ratings agency Standard & Poor's downgraded nine euro zone countries, including France and Austria, late last week.
Sentiment has improved since then and some market players said the unwinding of short positions may give the euro a further lift in the near term, pushing it through reported offers around $1.30, although further gains could be difficult.
In addition to the risk of a messy Greek default, market players still see downside risks to the euro in coming months due to concerns that the euro zone economy may slip into recession and limit progress toward fiscal consolidation in the region.
The dollar index edged 0.1 percent lower to 80.150, but off a two-week low of 79.999 hit earlier in the session.
The US dollar fell 0.2 percent against the yen to 76.980 , according to EBS.
Yen crosses have consolidated a bit lower on Friday despite bond yields pushing higher still, but they are well off recent lows as interest rate remains the key driver.
US benchmark Treasury yields rose for a third straight session on Friday to 2.0034 percent and hit a high of 2.0263 percent, a roughly two-week peak.
"The surge in bond yields has been sharp and noticeable and has clearly supported yen crosses of late and seems to have helped punish the other low yielders and money printers like the dollar, though not necessarily sterling," said John Hardy, head of FX strategy, at Saxo Bank in Copenhagen.
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