LONDON: The euro slipped from a three-week peak on Tuesday after euro zone finance ministers rejected an offer by private creditors to restructure Greek debt, but hopes for a deal to avert a messy default remained, limiting the common currency's losses.
Euro zone finance ministers sent back the Greek debt swap offer, saying the coupon demanded by bondholders was too high. Private creditors say a 4.0 percent coupon is the least they can accept if they are going to write down the nominal value of the debt they hold by a half.
The euro slipped as low as $1.2987 in Asia before steadying at $1.3025, close to flat for the day. On Monday, it had jumped more than 1 percent to a high of $1.3053 on the EBS trading platform as hopes of an eventual Greek deal drove a wave of short-covering.
"I think a deal will eventually be reached on Greece and for euro/dollar this has largely been priced in," said Lauren Rosborough, senior currency strategist at Societe Generale.
"Short positioning hasn't been taken away in the euro and I wouldn't want to discount a further rally from here but in the medium-term our core view remains for euro/dollar to fall back to $1.17 by mid-year," she added.
IMM speculative positioning data shows an extreme short position in the euro, which leaves it vulnerable to pullbacks, but market participants were sceptical over the sustainability of any rallies.
The euro's ability to hold its recent gains was undermined by suggestions that Portugal, seen as the second most risky country in the euro zone, could be the next potential default candidate after Greece.
Further dousing optimism, Germany denied a report that it was ready to boost the combined firepower of the euro zone's rescue funds to 750 billion euros ($979 billion).
Despite the pullback, the euro was still well above its 17-month EBS low of $1.2624 hit on Jan. 13, leading some to wonder if it might have bottomed for now.
Resistance was at 1.3077/1.3100, the Jan. 3 EBS high and a 38.2 percent retracement of the November-January slump. But a break above the October EBS low of $1.3145 was still needed to turn the technical picture positive, traders said.
Concerns over the fragile condition of the euro zone economy were eased after Germany's manufacturing sector grew in January for the first time since September but the overall economic outlook for the euro zone remained gloomy.
"We maintain EUR buying is unjustifiable viewed either from a European growth or policy perspective," said currency strategists at Credit Agricole CIB in a note.
Against the yen, the euro hit a near four-week high of 100.49 on Monday before steadying at 100.29 in Asia, still well off an 11-year EBS low of 97.04 marked on Jan 16.
The euro's retreat helped the dollar index rise off a three-week low of 79.602 hit on Monday to stand at 79.833. Support lies at 79.52, around the Jan. 3 low and the 55-day moving average around 79.57.
Against the yen, the greenback fetched 77.04, still tightly wedged in its prevailing trading range between 76.6 and 77.20. Reaction was muted to the Bank of Japan's widely expected decision to hold policy steady at its regular meeting, as well as cut its economic forecasts.
Waning risk appetite also pressured commodity currencies, with the Australian dollar slipping 0.4 percent to $1.0485, off a 12-week peak of $1.0574 set overnight.
Investors also awaited the outcome of the Federal Reserve policy meeting that starts later on Tuesday.
While no policy change is expected, the Fed will likely show that its policymakers do not expect to start hiking interest rates again until the first half of 2014, more than five years after chopping them to near zero, a Reuters poll of leading Wall Street economists showed.
Any signs that rates will stay lower for longer than expected could pressure the greenback.
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