Europe Markets

Greece deal: Why is the euro falling?

What the Greek talks mean for the euro

As stock markets around the world rally on hopes that the Greek crisis might soon be resolved, the euro has moved in the opposite direction, to the surprise of some market-watchers.

The euro has fallen over 1.5 percent against the dollar since the beginning of the week, to trade around 1.1184 at London market close Tuesday.

It comes amid a rally in stock markets on hopes that Greece will strike a deal with its creditors this week after months of wrangling over a reforms-for-rescue package.

Despite this, Jane Foley, senior currency strategist at Rabobank, highlighted that the euro was the worst performing currency out of the G-10 group of industrialized nations on Monday.

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For Thanos Vamvakidis, head of European G10 FX strategy at BofA Merrill Lynch, the euro's move in the opposite direction to stocks was indicative of the confusion surrounding the situation.

Read MoreGreek deal: Markets celebrating too soon?

"It is very difficult to trade Greece. You get random headlines; false positives…The market rallied following the proposals by the Greek government, but the truth remains that we did not achieve any progress – everything has been postponed until later in the week," he told CNBC late Monday.

"Even if you are concerned about Greece and you want to trade it, it is impossible."

Safe-haven status

The single currency also failed to get a boost on Tuesday from data for the euro zone which showed that business activity in the 19-member bloc expanded at its fastest pace in four years in June.

Rabobank's Foley argued that the euro's recent fall was down to the single currency acting as something of a safe haven, given its large current account surplus.

The euro 'will bounce back' on a deal

The euro has fared well in the face of mounting uncertainty surrounding the euro zone – over the last 30 days, it has risen 1.8 percent against the dollar.

"It follows that once risk appetite is restored that investors will again take advantage of the low interest rates that are prevalent through much of the euro zone and use the euro EUR to fund riskier trades in higher yielding assets," she wrote in a note Tuesday.


Capital Economics' Chief Global Economist, Julian Jessop, said that some investors had argued the euro had benefited from the uncertainty due to the unwinding of short positions linked to "carry trades."

A carry trade sees an investor take advance of different interest rates in different countries by borrowing in one currency and buying bonds in another.

But Jessop is not convinced.

"Rather than the recovery of the euro being a complicated by-product of increased nervousness about Greece, a simpler explanation starts from the proposition that markets have become more relaxed (we would say complacent) about the potential fallout," he wrote in a note.

Read MoreGreece divided over reforms and future

Looking ahead, BofA Merrill Lynch's Vamvakidis said that any move higher in the euro following a deal between Greece and its creditors would be short term.

"If we see the euro well above 1.15 we would expect the ECB (European Central Bank) to react. The ECB wants a weaker euro, so for them a strong euro would be a tightening of monetary conditions – they would not allow it," he told CNBC.

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