Euro dips as Greece worries intensify again

Euro and dollar notes
Kiyoshi Ota | Bloomberg | Getty Images

The euro weakened after the IMF pulled out of debt talks with Greece while the dollar clung to modest gains on Friday, having advanced after data showed the U.S. economy was gaining momentum.

Deadlines for Athens to secure a deal to release bailout funds have come and gone in the past two months, with officials scraping together the cash to keep government working and stave off a formal default.

Q2 will be much better than Q1: Pro

In that time, the euro has held up robustly against the dollar even as analysts projected that an eventual default and Greece's gradual departure from the euro zone can only hurt the single currency in the short run.

It fell 0.2 percent to $1.1240 in early European trade.

"Hard as the market tries to get away from the Greece theme, it keeps coming back onto the the radar," Morgan Stanley head of European FX Strategy in London, Ian Stannard, said.

"There has been some tinkering over the past few weeks to move the deadlines back, but it is going to get harder from now on. It does seem like we are finally getting to crunch time now, some decisions have to be made."

Without a deal, Greece is expected to default on a 1.6 billion euro ($1.8 billion) repayment to the IMF at the end of this month. That could trigger capital controls and possibly push the country out of the euro zone, with unpredictable consequences for the European economy.

The dollar index last traded at 95.128, recovering from Wednesday's near one-month low of 94.322.

Dollar bulls took some heart from data on Thursday showing U.S. retail sales rose sharply in May, adding to recent upbeat employment data that suggested the economy was warming up after a chilly start to the year.

If the momentum is sustained, the Federal Reserve might begin to hike interest rates later in the year, a scenario still favoured by many economists.

Read MoreCould a kiwi with laser eyes be on this nation's next flag?

Yet the dollar's reaction was limited at best, partly held back by a fall in U.S. Treasury yields and caution before the June 16-17 Federal Open Market Committee (FOMC) meeting. Fed funds futures also barely reacted to the data.

"With Q2 having been a difficult quarter for many market participants and the FOMC meeting looming next week, there may be some reluctance to rebuild long positions in the USD or short positions in front-end rates," BNP Paribas analysts wrote in a note to clients.

The greenback bought 123.62 yen, well off this week's trough of 122.46, but also some distance from a 13-year high of 125.86 struck last Friday on robust U.S. non-farm payrolls data.

"The dollar will have a hard time retesting highs before next week's Fed meeting," IG Securities market analyst, Junichi Ishikawa, said.

"Amid an absence of immediate fundamental factors - which the Fed meeting will provide - the pair is trading on technical factors and likely to be stuck in the 122-125 yen range."