NEW YORK: The euro slumped against the dollar on Thursday, surrendering early gains as concerns resurfaced about the risk of a chaotic default in Greece, offsetting earlier supportive comments from Chinese premier Wen Jiabao.
The euro fell to a session low of $1.3083 after Eurogroup head Jean-Claude Juncker said the outcome of this week's EU summit was "largely insufficient" when it came to tackling the sovereign debt crisis and described Greek debt talks as "ultra-difficult".
That was a reverse from earlier gains after China's Wen said the country was considering greater involvement in the European Financial Stability Facility (EFSF) and its successor, the European Stability Mechanism (ESM).
"The statement by Eurogroup chair Juncker that the Greek (private sector involvement) talks are 'ultra difficult' does not seem to suggest that they are 'on the verge' of a deal," said David Watt, senior currency strategist at RBC Capital Markets in Toronto.
The euro was last down 0.3 percent at $1.3123, remaining within its range of the last week, roughly between $1.3020 and $1.3230. Analysts said a Greek deal could make the euro break higher, but any rally may only be temporary.
Traders highlighted the fact that Wen tempered his comments, saying Europe must rely on itself, reduce its debt load and introduce structural reforms. He also said China was still researching how to participate in the EFSF and ESM.
Analysts said although greater support from China would be helpful, it was not a game-changing event for the euro zone, and the progress of talks to avoid a disorderly Greek default was more significant in the near term.
Investors are also concerned Portugal could need a second bailout or even follow in Greece's footsteps and demand a debt haircut, after yields on Portuguese government debt reached euro-era highs earlier this week.
Decent demand at French and Spanish auctions had little impact, with market players attributing recent successful euro zone debt auctions to the European Central Bank's injection of nearly half a trillion euros of cheap funds.
Trends in FX options suggested investors were increasingly concerned about the risks of the euro sliding further.
Euro/dollar risk reversals showed the premium to buy bets on a drop in the euro has risen steadily from lows hit in mid-January, while a trader reported demand to buy six-month to one-year options with strikes in the low $1.20s.
BERNANKE EYED
The dollar dipped 0.1 percent to 76.10 yen, sticking near a three-month low touched on Wednesday and keeping alive concerns that Japanese authorities may intervene to curb yen strength.
The dollar has been edging closer to a record low of 75.311 yen touched on electronic trading platform EBS on Oct. 31, when Japan intervened to curb yen strength.
The US currency has been under pressure against the yen since the Federal Reserve said last week it was likely to keep interest rates near zero at least until late 2014.
Federal Reserve Chairman Ben Bernanke will give a testimony on the state of the US economy later in the session and market players will watch for any signs the central bank may be edging closer to implementing a further round of quantitative easing.
"The focus now will be whether Bernanke reinforces current expectations of further easing from the Fed," said Lee Hardman, currency strategist at BTM-UFJ.
Japanese Finance Minister Jun Azumi said on Thursday he is prepared to take firm measures on currencies when needed, hinting at the chance of solo intervention by Japan in forex markets as the yen edges higher versus the dollar.
Analysts said Japan may intervene if dollar/yen drops below 75.50 yen or if market volatility were to increase sharply.
Markets were also on watch for any moves from the Swiss National Bank as the euro traded within sight of the floor it set at 1.20 Swiss francs.
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