Euro weakens vs dollar but losses seen contained

By Gertrude Chavez-Dreyfuss

NEW YORK (Reuters) – The euro slid Monday after two days of gains, pressured by a comment from a German official saying a second Greek bailout was not yet certain, although belief that Greece will be able to avert default on its massive debt should limit the currency’s losses.

Policymakers have inched toward a new bailout package for Greece that German media said could exceed 100 billion euros.

That helped push the euro to a one-month high of $1.46590 early in the session on trading platform EBS. But the euro slipped after a spokesman for the German finance ministry said a second aid program was not certain. It was last down 0.3 percent at $1.45940.

Greece received a 110-billion-euro aid package a year ago.

However, traders said the market expects to see a deal that gives Greece more time to repay its debt.

“We’re seeing a bit of a corrective pullback in the euro after gains last week and in general the euro remains sensitive to headlines on Greece,” said Vassili Serebriakov, currency strategist, at Wells Fargo in New York.

“There are a lot of moving parts and a lot of details to fine-tune on Greece’s second aid plan, but overall, I see everything working out. It is clear that the EU won’t allow Greece to fail.”

Karen Olney, UBS’s head of thematic research, echoed that sentiment. She said at a Reuters Investment Outlook Summit Monday that Greece’s plight would be eased without triggering a larger financial crisis or recession. “It’s not a Lehman moment,” she said.

Investors are also looking to Thursday’s European Central Bank meeting, at which ECB President Jean-Claude Trichet is expected to hint at a July interest rate hike.

“The focus will turn toward interest rate differentials, and with the Federal Reserve unlikely to do anything this year, an ECB rate hike will pull money toward the euro and other currencies,” said Boris Schlossberg, director of FX research at GFT Forex. “There’s no reason whatsoever to own dollars now.”

If Trichet hints at a July rate hike by talking tough on inflation, Schlossberg said the euro could retest a 2011 high around $1.4940.

Trichet, speaking in Montreal, reiterated the need to prevent commodity price increases from triggering second-round effects on inflation.. His comments had little impact on the market, though they did add to the hawkish view on euro zone interest rates.

For now, options barriers were stacked around $1.47000, traders said, with resistance also seen at $1.47100 — the 76.4 percent retracement of the euro’s May decline.

Some currency portfolio managers have also shifted back toward a long euro positioning in the latest week, according to Quaesta Capital, a $3.5 billion fund of funds based in Zurich, Switzerland.

The dollar hit a one-month low beneath 80 yen before rebounding to 80.140 yen, down about 0.1 percent. Asian sovereigns were said to be dollar buyers below the 80 level.

Commodity currencies also benefited from weakness in the greenback. The Australian dollar traded at US$1.0717, near Friday’s 3-1/2-week high of US$1.0775.

The dollar index dipped as low as 73.643 — a trough not seen since May 5. A recent spate of soft U.S. data has raised concerns about the strength of the U.S. economy. A report Friday showed a sharp slowdown in job creation, pushing the unemployment rate up to 9.1 percent.

But by early afternoon, the dollar index was up 0.2 percent at 73.920.

With the Fed not likely to lift interest rates for some time, investors should continue to short the dollar, ”especially against capacity-constrained, rising-interest-rate currencies like the Indian rupee and Brazilian real ,”said Faros Trading head of research Dan Dorrow. (Additional reporting by Steven C. Johnson; Editing by Dan Grebler)