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Greek crisis brings out dollar bulls (cautiously)

Mounting concern about Greece's future is taking a toll on the euro -- and yes, the dollar is benefiting from that -- but an aggressive rally in the greenback is unlikely while U.S. data remains weak, analysts said.

The euro skidded 0.8 percent to around $1.0892 on Monday after Greece missed a self-imposed Sunday deadline to reach a deal with its lenders to unlock crucial aid. An agreement is seen as key for Greece avoiding a debt default and dodging a potential exit from the euro zone.


Philippe Huguen | AFP | Getty Images

"We have moved from a situation where Greece really wasn't an issue and people were not pricing it in to now, where it is becoming an issue for the euro," Geoffrey Yu, a currency strategist at UBS, told CNBC.

"I wouldn't say the euro is going to correct massively yet, because even under a negative scenario where Greece missus a (debt) payment, Greece is largely quarantined and the risks are not systemic."

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Still, Yu added that the risk for the euro was that one event – such as Greece a missing a debt payment -- raises the prospect of another event - for instance, a debt default -- which encourages investors to dump the single currency for the safety of others, such as the dollar.

Greece faces a number of debt repayments to the International Monetary Fund this month, starting with a 300 million euro ($328 million) loan repayment due this Friday.

Indeed, helped by Greek woes, the dollar index rose almost 0.5 percent on Monday to 97.35. That took the index, which measures the dollar's value against a basket of other major currencies, within sight of a one-month high hit last week of 97.775.

Complicated

But analysts said that sharp falls in the euro were unlikely, and that talk of a move to parity against the dollar, which seemed so dominant just a couple of months ago, was unlikely to resurface in a strong way.

And that's because of a string of disappointing U.S. economic data that was keeping U.S. rate hike talk at bay for now.

Data on Friday showed U.S. gross domestic product declined at a 0.7 percent annual rate in the first quarter of the year compared with an initial estimate of 0.2 percent growth. The University of Michigan's consumer sentiment for May, meanwhile, marked a fall and the May Chicago Purchasing Manager's Index dropped unexpectedly.

"It's fairly obvious that Greece concerns are creating a lot of volatility. But we have the nonfarm payrolls report on Friday and that is going to convolute the story," Jane Foley, senior currency strategist at Rabobank, told CNBC, referring to one of the most closely-watched U.S. economic indicators.

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"We've seen the dollar recover since the middle of May, but if payrolls are weak then obviously the story is complicated and could slow the downside in euro/dollar," she added.

Foley said that Rabobank was sticking to its forecasts for the euro to fall to around $1.05 by year-end.

"Parity talk could come back certainly, but looking at the U.S. data right now I'm quite happy that parity is not on our forecast table," she said.

Boris Schlossberg, managing director of FX Strategy at BK Asset Management, agreed that the euro would rise or fall not on its own fortunes but on the strength of the dollar.

"To that end this week's economic data could prove pivotal to the dollar rally," he said in a note on Monday.