Recuperating euro stung by Greek uncertainty

The map of Europe is featured on the face of a two Euro coin seen in this photo illustration taken in Rome, December 3, 2011.

SYDNEY (Reuters) - The euro retreated from a three-week peak against the dollar in Asia on Tuesday and looked vulnerable to extending its pullback after talks to reduce Greece's debt burden suffered a setback.

The single currency shed some 30 pips on news that euro zone finance ministers had sent back for further negotiations a debt restructuring offer from private Greek bondholders to achieve a lower average coupon on new Greek bonds.

The euro dipped to $1.3005 from $1.3034 late in New York, before steadying at $1.3014. On Monday, it jumped more than 1 percent to around $1.3050 as hopes of an eventual Greek deal drove a wave of short covering.

Further dousing market optimism, Germany denied a report that it was ready to boost the combined firepower of the euro zone's rescue funds to 750 billion euros.

"Considering the euro rallied over 150 pips on this overnight, the common currency looks vulnerable today, especially with Greek debt negotiations on the rocks and downgrades of European banks by S&P," said David Scutt, a trader at Arab Bank in Sydney.

Standard & Poor's cut its ratings by a notch for several French banks including Credit Agricole and Societe Generale. However, the move was expected following S&P's downgrade of France's ratings to AA+ earlier in the month.

Despite the pullback, the euro was still up some 3 percent from a 17-month trough of $1.2623 plumbed on Jan 13. While its resilience has confounded some market players, traders said the euro was always at risk of being squeezed higher given record short speculative positions.

There was also talk that markets were starting to believe that last month's injection of nearly half a trillion euros of three-year funds (LTRO) into the banking system by the European Central Bank has bought politicians time to solve the region's debt crisis.

Barclays Capital analysts said the recent improvement in the global risk sentiment is likely to stay on trend. "We expect the upcoming auction of LTRO (in February) to keep market sentiment anchored, providing risky assets room to extend the recent rally," they wrote in a note.

Resistance for the euro is now seen around $1.3076/1.3100, the Jan 3 high and 38.2 percent retracement of the November to January slump. But a break above the October low of $1.3144 is still needed to turn the technical picture positive, traders said.

Against the yen, it hit a near four-week high of 100.49, before retreating to 100.12, still well off an 11-year trough around 97.00 plumbed on Jan 16.

The euro's retreat helped the dollar index .DXY bounce off a three-week low of 79.602 to last stand at 79.788. Against the yen, the greenback fetched 77.00, in the middle of a prevailing trading range roughly between 76.6 and 77.20.

The rally in commodity currencies also took a bit of a breather with the Australian dollar at $1.0518, slightly off a 12-week peak of $1.0574 set overnight.

Many Asian centers are still closed for the Lunar New Year holidays, meaning trading in Asia will probably be pretty subdued.

Some market players are also awaiting the outcome of the U.S. Federal Reserve policy meeting, which starts later on Tuesday.

While no policy change is expected, the Fed will likely show that its policymakers expect to start hiking interest rates again only in the first half of 2014, more than five years after chopping them to near zero, a Reuters poll of leading Wall Street economists showed.

Any signs that rates will stay lower for longer could put some pressure on the greenback.

(Editing by Wayne Cole)