NEW YORK: The euro fell from a near three-week high against the dollar on Tuesday on worries that efforts to restructure Greece's debt might not be enough to save the country from a messy default.
Euro zone finance ministers rejected as insufficient an offer made by private creditors to help restructure Greece's debts, sending negotiators back to the drawing board and raising the threat of a disorderly default by Greece.
Athens is desperate for a deal within days to ensure funds from a 130-billion-euro rescue plan drawn up by European partners and the International Monetary Fund arrive before 14.5 billion euros bond redemptions fall due in March.
"There's still an impasse in the Greek debt swap negotiations," said Brian Dolan, chief currency strategist with Forex.com in Bedminster, New Jersey. "The euro had a nice rebound, but we're seeing a little bit of a pullback on the disappointment."
The euro had rallied in recent sessions on hopes talks between Greece and its creditors could result in a voluntary agreement. The euro last traded at $1.2964 against the US dollar on Tuesday, a fall of 0.49 percent.
The greenback also advanced against other currencies, rising 0.42 percent against the Swiss franc to 0.9305.
Adding to unease over the debt talks, Standard & Poor's will likely downgrade Greece's ratings to "selective default" when the country concludes its debt restructuring, an official with the ratings agency said on Tuesday.
The euro's fall came even as surveys showed the euro zone may yet escape recession thanks to a surprise upturn in the service sector, which offset ongoing contraction in manufacturing this month, briefly pushing the euro to the day's highs.
"Euro zone PMIs probably helped but we are not trading the euro on growth prospects. We are more worried about the structural implications of the euro crisis and the headlines we are waiting for with regards to Greece and a PSI (private sector involvement) deal," said Carl Hammer, chief currency strategist at SEB.
The euro held well above its 17-month EBS low of $1.2624 hit on Jan. 13. Topside resistance was at $1.3077/1.3100, the Jan. 3 high and a 38.2 percent retracement of the November-January slump. Traders said a break above the October EBS low of $1.3145 was still needed to turn the technical picture positive.
In contrast, a drop below $1.2830-$1.2880 could fuel more losses, analysts said.
"We still think there is a fair amount of complacency here, and anything other than a voluntary PSI deal is going to have a sticker shock value," said Ray Attrill, head of FX strategy for North America at BNP Paribas in New York.
IMM speculative positioning data shows an extreme short position in the euro, which leaves it vulnerable to pullbacks, but market participants were skeptical over the sustainability of any rallies.
"Sooner rather than later sellers will appear again, although there is a bit more short covering to happen before we will continue a euro downtrend," said SEB's Hammer.
Despite the better PMI surveys, many market players expect the euro to endure a prolonged period of sluggish growth, forcing the European Central Bank to keep interest rates low.
Jaco Rouw, senior currency strategist at ING Investment Management, said the ECB's stance in providing long-term low-rate funding for European banks meant the euro had become the funding currency of choice.
"The euro region will be one of the weakest in the world, it will see a recession. Rate cuts will make the euro a more attractive funding currency," Rouw said.
BOJ ON HOLD
Against the yen, the euro hit a near four-week high of 100.97 before trading back at 100.78, according to Reuters data , moving further away from an 11-year EBS low of 97.04 marked on Jan. 16. Traders cited Japanese importer demand triggering stop-losses around 100.50.
The dollar rose to a near four-week high of 77.81 yen before trading at 77.770 yen in a move that traders said was largely driven by euro/yen demand. 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.
Investors also awaited the outcome of the US Federal Reserve policy meeting that starts 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.
Comments
Comments are closed.