Euro drops as Greek debt stalemate fans fears

NEW YORK Tue Jan 24, 2012 4:54pm EST

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.    REUTERS/Tony Gentile

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.

Credit: Reuters/Tony Gentile

NEW YORK (Reuters) - The euro retreated from a near three-week high against the dollar on Tuesday as a stalemate in the talks to restructure Greece's debt raised concerns that Greece might succumb to a disorderly default.

Greece's private creditors pleaded with European officials who rejected as insufficient their bond swap offer to hammer together a deal that will ensure Greece secures needed bailout funds before 14.5 billion euros of bond redemptions fall due in March.

Failure to avoid a disorderly default could raise the possibility of contagion among euro zone nations, hit global economic growth and hurt Europe's banking system.

A strong short-covering rally had driven the euro to an almost three-week high on Monday, and many analysts believe the single currency was positioned for a pause.

"Markets are trying very hard not to do anything, and that's why we're in a relatively tight trading range," said Dean Popplewell, chief currency strategist at OANDA in Toronto.

"The market is record short," he added. "That's why we're actually seeing these tight trading ranges, until we get a better understanding of exactly what's happening with the bondholders and what's happening with Greece."

In late afternoon New York trade the euro was nearly unchanged at $1.3024, according to Reuters data. The euro had hit a global session low of $1.2952, compared with a 17-month EBS low of $1.2624 hit on January 13.

The euro's recent trading against the dollar leaves it struggling to break through the 23.6 percent Fibonacci retracement of the move from the peak of August 29 at $1.4548 to the January 13 trough.

Adding to unease over the debt talks, Standard & Poor's will likely downgrade Greece's ratings to "selective default" when the country concludes its debt restructuring, an official with the ratings agency said on Tuesday.

"Everyone from rating agencies to investors are losing patience with Greece and coming to the realization that a resolution to the country's debt troubles may not be reached until the 11th hour when a deal is put together haphazardly," said Kathy Lien, director of currency research at GFT Forex in Jersey City, New Jersey.

The euro slid even as surveys showed the euro zone may yet escape recession thanks to a surprise upturn in the service sector.

But worries still abound. The International Monetary Fund said on Tuesday that Europe's debt crisis could tip the world economy into recession, and a bigger firewall is urgently needed to keep the damage from spreading.

The IMF chopped its estimate for 2012 global growth to 3.3 percent from 4 percent just three months ago and warned it could drop as low as 1.3 percent if Europe lets the crisis fester for much longer.

YEN HURT BY JAPAN DEFICIT NEWS

The yen slid against both the euro and the dollar on Tuesday, hurt by news that Japan probably produced its first trade deficit last year in more than three decades, a major blow to an economy built on exports prowess.

The euro hit a four-week high of 101.29 yen, according to Reuters data. It last traded at 101.24, up 0.9 percent. The euro had hit an 11-year EBS low of 97.04 yen on January 16.

The dollar rose to a near four-week high of 77.84 yen before trading at 77.72 yen, up 0.9 percent.

The Bank of Japan held policy steady at its regular meeting and cut its economic forecasts.

Investors are also awaiting the outcome of the Federal Reserve's two-day policy meeting that started on Tuesday.

While no policy change is expected, the Fed will likely show that its policymakers do not expect to start hiking interest rates again until the first half of 2014, more than five years after chopping them to near zero.

(Reporting by Julie Haviv; Additional reporting by Luciana Lopez and Nick Olivari in New York and Nia Williams in London; Editing by Leslie Adler)