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FOREX-Euro falls as concerns over Greece flare up

Anooja Debnath
Friday, 26 Oct 2012 | 11:56 AM ET

* Euro falls broadly, traders cite Greece uncertainty

* Dollar retreats after hitting 4-month high vs yen

* U.S. third-quarter GDP due 1230 GMT

LONDON, Oct 26 (Reuters) - The euro hit a two-week low against the dollar and fell against the yen on Friday, with traders citing concerns that Greece may miss its austerity targets and political uncertainty in Athens.

A report from the International Monetary Fund said Greek debt would be above the target agreed with international lenders, while the Greek government said a deal on Athens' latest austerity package was being held up by opposition from a coalition ally.

The euro fell 0.3 percent to $1.2893, retreating from its Oct. 17 high of $1.3140. It also dropped 1 percent against the safe haven yen to 102.725 yen, a 10-day low.

The outlook for the euro was also clouded by uncertainty about when Spain will request a bailout that could trigger the European Central Bank's bond-buying programme.

``People are still concerned about Spain asking for a bailout and Greece remains a problem too. I remain bearish on the euro,'' said Lutz Karpowitz, FX strategist at Commerzbank.

The euro has struggled this week on grim economic data and fresh signs that the region's powerhouse, Germany, is struggling.

Traders said the single currency was likely to be caught in a $1.2800/1.3200 range until Spain asks for aid. Offers were cited around $1.2960 and above $1.3000.

Options market activity also suggested the euro was likely to stay in a range against the dollar in the near term. One-month implied volatility was at 8.05 vols, near levels last seen in late 2007.

YEN SEEN VULNERABLE

The yen recouped losses against the dollar after touching a four-month low, although it looked vulnerable to expectations of policy easing by the Bank of Japan on Oct. 30.

The dollar was down 0.6 percent at 79.77 yen after earlier hitting 80.38 yen. Some investors booked profits on long dollar positions before the advance reading of U.S. third-quarter gross domestic product, due at 1230 GMT.

A robust GDP reading could see the dollar touch its June peak of 80.63 yen with the April peak of 81.78 a possible target, while a disappointing number could see the dollar pull back.

Some strategists said a weekly close above 80 yen would be a strong bullish signal that may prompt further dollar demand.

The greenback was set to end the week higher, adding to last week's rise of 1.1 percent and helped by widening spreads between two-year U.S. Treasuries and Japanese government bond yields, with which the dollar/yen has a strong correlation.

``Dollar/yen has risen well ahead of itself in the past few weeks and while on a multi-month basis we expect it to rise, there will be some profit taking in the short term to smoothen out the move,'' said George Saravelos, G10 FX strategist at Deutsche Bank.

The BOJ is expected to ease monetary policy at its meeting on Tuesday by expanding asset purchases, and it could make a stronger commitment to keep pumping cash until its 1 percent inflation target is attained.

Japanese inflation data reinforced expectations the BOJ will ease, with core consumer prices falling for the fifth successive month in the year to September.

The higher-yielding Australian dollar dipped 0.15 percent to $1.0329 as stock markets fell, off the week's high of $1.0397 hit on Thursday.