LONDON: The euro fell to a three-week low versus the dollar on Thursday as euro zone officials put off agreeing further aid for Greece, sparking fears of a chaotic default and leaving the euro vulnerable to more falls.
Frustrated by Greek political wrangling, euro zone finance ministers on Wednesday failed to reach agreement on a bailout package for Athens, delaying a decision on the matter until ministers meet on Monday.
Analysts said most in the market still expect Greece to avoid a disorderly default, and anything that shakes this conviction would trigger another wave of euro selling. The options market showed investors were increasingly looking to buy protection against further euro losses.
"The market is probably pricing in a better than evens probability that a near-term deal will be reached on Greece and avoid a messy default, which suggests there are more risks to the downside for the euro if there is no deal on Monday," said Adam Cole, global head of currency strategy at RBC.
The euro fell below psychologically key support and a reported options barrier at $1.30 to hit $1.2983, its weakest since Jan. 25, although technical analysts said support around $1.2965-75 may help stem losses. It was last down 0.6 percent at $1.2994.
Greece must repay 14.5 billion euros of debt on March 20, which it cannot do without the help of international aid. Analysts said failure to reach a deal on Monday could see the euro drop towards the mid-January low around $1.2624.
Risk reversals showed a jump in the premium charged to buy bets on the euro falling versus the dollar, with the one-month contract rising to 2.25 from 1.85 on Wednesday.
"There are no answers on how Greece will be treated ... If there is no resolution it poses risks for the euro," said Carl Hammer, chief currency strategist at SEB in Stockholm.
SEB have a forecast for the euro to fall to $1.25 by the end of the first quarter, but Hammer said it could reach this level sooner. A break below support around $1.29 would open up a move towards the lows hit in the middle of last month.
EU sources said the euro zone is examining ways of holding back parts or even all of Greece's second bailout funds while still avoiding a disorderly default next month.
Uncertainty over a bailout, and whether policymakers could hold back funds without triggering a messy default, stopped the euro benefiting from news that Greek party leaders have met the final two demands set by international lenders.
If the Greece situation is not contained fears will quickly grow that other highly indebted euro zone countries may follow.
DOLLAR FIRMS
Risk aversion due to the Greece worries buoyed the safe-haven US dollar, with the dollar index hitting a three-week high of 80.078.
The US currency also rose to a 3-1/2 month high of 78.83 yen, breaking above reported stop loss orders above 78.80 yen, although traders said option-related offers ahead of 79 yen may cap gains.
The dollar was lifted versus the yen after a firm break above its 200-day moving average this week, though some analysts cautioned that it was premature to say whether there would be further gains in the dollar.
The minutes of the Federal Reserve's January policy meeting showed a few officials believed another round of quantitative easing, which is typically negative for the dollar, would be needed to support the US economy.
The euro was steady against the yen at 102.45 yen , unable to clear important resistance including the 90-day average at 102.74 and Ichimoku cloud top at 102.79.
Elsewhere, the Swedish crown fell against the euro after the Swedish central bank cut interest rates by 25 basis points to 1.50 percent.
The Australian dollar was down 0.3 percent at $1.0665 , failing to benefit from strong Australian employment data as doubts over a Greek bailout undermined risky assets.
Copyright Reuters, 2012
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