The euro fell to a three-week low versus the dollar on Thursday as eurozone officials put off agreeing further aid for Greece, sparking renewed fears of a chaotic default and leaving the common currency vulnerable to a drop towards last month's lows.
Eurozone peripheral bond spreads widened over their German counterparts while the cost of insuring Italian and Spanish government bonds against default rose as investors' frustration at the political wrangling surrounding the Greek deal mounted. Eurozone finance ministers on Wednesday failed to reach agreement on a new bailout package for Athens, delaying a decision until 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 euro fell below psychologically key support and a reported options barrier at $1.30 to hit $1.29744 on trading platform EBS, its weakest since January 25, although technical analysts said support around $1.2965-75 may help stem losses. It was last down 0.65 percent at $1.2985.
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. In the options market, 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. SEB forecasts the euro will 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 of $1.2624 hit in the middle of last month.
Risk aversion due to Greek worries buoyed the safe-haven 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.
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.