The euro rose against the dollar on Tuesday, supported by expectations a Greek debt restructuring deal could be clinched soon, while a resurgent yen raised concern Japanese authorities could intervene The dollar hit a three-month low against the yen, under pressure after the US Federal Reserve said last week it was likely to keep interest rates near zero until late 2014.
The euro got a lift after Greek Prime Minister Lucas Papademos said negotiators had made "significant progress" in talks to strike a restructuring deal on government debt, with the aim of a definitive agreement by the end of this week. The euro, on track for its best monthly performance since October, was up 0.4 percent at $1.3184. It peaked at $1.3213, not far from a six-week high of $1.3235 hit last week on trading platform EBS.
The euro faces resistance at that level and also near $1.3244, the 38.2 percent retracement of its October-January slide. "Risk is on at the moment but we are sceptical it is going to last. In the near term markets see a resolution to a Greek private sector involvement deal and that is having a bigger influence than Portugal," said Derek Halpenny, head of global currency research at Bank of Tokyo-Mitsubishi.
A Reuters poll showed traders expect the ECB to allot 325 billion euros at the tender, which is likely to support riskier currencies in coming weeks. The dollar hit a three-month low of 76.175 yen on EBS, having touched 78.288 yen last week. The dollar was last trading up 0.1 percent on the day at 76.36 yen, with traders citing talk of dollar bids down towards 76.00 yen and stop-loss dollar offers below 75.80 yen.
Japanese Finance Minister Jun Azumi vowed firm steps against excess volatility and speculative moves in the foreign exchange market to curb any renewed rises in the yen. A Reuters poll showed Japanese fund managers were keen to return funds to Japan as they saw Tokyo shares relatively undervalued while they cut their North American stock weightings. As such, not many expect yen-selling intervention, although market wariness is likely to rise if the dollar drops down to around 75 yen.
Dollar/yen implied vols rose as markets priced in possible turbulence. One-month traded around 7.95 percent versus 7.25 on Monday, with one-year vols at 10.90 percent versus 10.70. Risk-reversals were steady, with the one-month around 0.35 in favour of dollar calls. Traders were also watching for any moves from the Swiss National Bank as the euro traded close to the 1.20 franc floor in euro/Swiss that policymakers have pledged to defend. The euro was last down 0.1 percent at 1.2042 francs on EBS.