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Mon 20 Jun 2011 08:38 AM

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Euro dips as Europe defers decision on Greece

Currency reacts to delay of final decision on extending next tranche of Greek bailout funds

Euro dips as Europe defers decision on Greece
Euro currency
Euro dips as Europe defers decision on Greece
Euro currency
Euro dips as Europe defers decision on Greece
US dollar and euro currency

The euro edged lower on Monday, giving back some of the gains it made late last week, as euro zone finance ministers postponed a final decision on extending the next tranche of Greek bailout funds to early July.

Euro zone finance ministers said they expected to pay a further €12bn in emergency loans to Greece by mid-July, but added that disbursement would depend on the Greek parliament first passing laws on fiscal reforms.

The euro dipped 0.3 percent to $1.4263 , edging back in the direction of a three-week low of $1.4073 hit last Thursday on trading platform EBS.

"They will probably will disburse the funds, because you would think that there is no way that they will allow a default [by Greece]," said Koji Fukaya, director of global foreign exchange research for Credit Suisse Securities in Tokyo.

"But the situation still remains opaque," he said, adding that euro zone officials may be trying to put pressure on Greece's parliament to adopt fiscal austerity measures.

Traders said a break of $1.4350 could pave the way for a test of $1.4400. A fall through $1.4220, however, could see a retreat to $1.4070, the lower-end of the consolidation band.

Euro zone finance ministers also agreed that they would seek a voluntary rollover of Greek debt by private bondholders to finance a substantial part of Greek funding needs in coming years.

Hopes that European officials were seeking a solution along such lines, which could limit the burden on private holders of Greek bonds, had given a boost to the euro late last week, contributing to its 0.7 percent rise on Friday.

One factor that may lend support to the euro in the near-term is the Fed's policy meeting later this week, market players said.

The US central bank is expected to restate its commitment to hold interest rates near zero for an extended period amid signs the recovery has lost momentum and continue to reinvest proceeds from maturing bonds it holds to make sure its balance-sheet does not shrink.

"I think what the market is probably expecting is for the Fed to end QE2...but to keep its balance sheet bloated," said a trader for a Japanese brokerage house in Tokyo.

If the Fed goes a step further and suggests that it may embark on a third round of quantitative easing if needed, that could trigger dollar-selling and help prop up the euro, the trader said.

Markets are also closely watching the result of a vote of confidence faced by the newly reshuffled Greek cabinet.

"We suspect many of the recent moves across asset classes have been driven by a bout of (justified) risk aversion and tail risk hedging against a disorderly Greek default that will likely now not materialize in the near term," said Laurent Fransolet, a strategist at Barclays Capital.

"While such hedges might not come off immediately, the risk-off trade is likely to revert at least partly."

The euro's dip saw the dollar index , which tracks the greenback's performance against a basket of major currencies, rise 0.3 percent to 75.191.

The dollar also edged higher against the yen, rising 0.1 percent to 80.15 yen . The trader for a Japanese brokerage house said there was talk of stop-loss offers near 79.50 yen, adding that a breach of that level could open the way for the dollar to drop below 79.00 yen.

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