NEW YORK: The euro slid to a fresh four-month low against the dollar on Tuesday after a spokesman for the Greek president said the country will hold new elections after political leaders failed to reach agreement on a coalition government.
In a sign of a swift rise in risk aversion, German government bonds rose sharply and Italian 10-year yields hit 6 percent on the news.
The dollar, bolstered by safe-haven flows, also gained against the yen as investors compared US data releases to those from elsewhere in the world and saw the world's largest economy on track to recovery, albeit at a slow pace.
The Greek news "triggered the (euro's) fall through $1.2800 and it looks like they can't compromise so they will have to hold elections," said Boris Schlossberg, director of FX Research at GFT in Jersey City, New Jersey. "They are running out of money ahead of elections so expect European leaders in the next few days to put enormous pressure on them to come up with a workable government along with some sort of extended schedule for the bailout."
The euro was last down 0.5 percent at $1.2765 with the session trough at $1.2752, the lowest since Jan. 18.
Adding to the woes, data on Tuesday showed the Greek economy deep in recession. Even ahead of the New York open, investors were cautious on Greek President Karolos Papoulias's proposal to put together an administration of technocrats with most believing it was unlikely to be accepted, making a new election
the most likely outcome.
Greece confirmed on Tuesday it would pay a bond maturing on May 15 and its accrued interest on time after weighing pros and cons and current conditions but that did little to console investors.
While there was some good news from Germany, the euro zone's largest economy, where a report showed the economy grew 0.5 percent in the first quarter of 2012, it was largely offset by a survey of German analyst and investor sentiment which deteriorated sharply in May, while GDP in France flatlined and Italy's economy contracted by 0.8 percent.
DOLLAR BOOST
The US data did nothing to prevent flows into the dollar and at the margin helped, according to analysts.
"It's not great (US) data but if you compare it to the overall flavor of the euro zone and China, the US economy is outperforming in its recovery," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange, Inc in Washington.
US retail sales edged up 0.1 percent, the smallest gain since December, held back by a decline in receipts from building materials and clothing stores, the Commerce Department said on Tuesday.
Simultaneously, US consumer prices were flat in April as households paid less for gasoline and natural gas, the Labor Department said.
A third report showed US homebuilder sentiment improved in May to its highest in five years, suggesting stabilization in the housing market is taking hold, according to data from the National Association of Home Builders.
The US reports sent the dollar to a session high against the yen at 80.14 yen. The dollar last traded at 80.09 yen, up 0.3 percent, well above a 2-1/2-month low hit last week.
The Australian dollar touched a five-month low after minutes of the latest Reserve Bank of Australia meeting showed concerns about a cooling in growth and inflation were behind its unexpected 50 basis point rate cut in May. It pared losses to trade at $0.9966, up 0.1 percent.