Euro slips on possible delay on Greek bailout

Euro banknotes and a currency graph are placed on mirror and in this picture illustration taken in Zenica, January 22, 2011.

NEW YORK (Reuters) - The euro slipped to a more than one-week low against the dollar on Wednesday and fell against the yen, after earlier hitting a two-month peak, as euro zone officials considered ways to delay a second bailout package for Greece while still avoiding a chaotic debt default.

European Union sources said the delay could last until after Greece holds elections in April, though there are options being considered that would still let Greece meet a 14.5 billion euro bond redemption payment due on March 20.

The news triggered stop-loss sell orders on the break of $1.31 in euro/dollar and below 102.82 yen in euro/yen.

As the rhetoric ramped up, a visibly angry Greek President Karolos Papoulias accused German Finance Minister Wolfgang Schaeuble of insulting his nation, reflecting growing public resentment of almost daily lectures from Berlin on the dire state of the Greek economy.

Later, Greek Finance Minister Evangelos Venizelos said Greece could announce a debt swap scheme with private bondholders on Monday if euro zone ministers at a meeting that day sign off on an overall rescue package.

"Europe and Greece are playing a game of chicken, and unfortunately their mutual unwillingness to back down this close to the March 20 deadline means that default may be unavoidable," said Kathy Lien, director of FX research at GFT in Jersey City, New Jersey. "In fact, the refusal of euro area countries to unlock bailout funds is a sign that they have become more willing to let Greece default."

The headlines on Greece overshadowed news that China would continue investing in euro zone debt and pledges from Greek Conservative party leader Antonis Samaras to commit to tough austerity measures.

In early afternoon New York trade, the euro was down 0.3 percent at $1.3072, according to Reuters data. At one point the euro fell to its lowest level since February 6 at $1.3043.

Traders cited key support around $1.3025, near the lows of February 1 and February 6, with psychological support still at the $1.30 level.

Goldman Sachs said in a research note it closed its long euro/dollar trade as "the next few weeks will see significant uncertainties" linked to the implementation of the Greek rescue package. The bank added that near-term volatility could pick up.

In addition, Goldman said the compression in sovereign spreads in the euro zone, one of the main reasons for the initial long euro/dollar trade recommendation, has run its course. "Although the compression may extend, the upside is now significantly smaller versus a month ago," the U.S. investment bank said.

Against the yen, the euro fell from roughly two-month highs after the Greek news, and hit session lows at 102.17, using Reuters data. Hedge funds were reportedly sellers of euros versus the Japanese currency. The euro was last at 102.42 yen, down 0.5 percent.

Data showed the euro zone's gross domestic product contracted in the fourth quarter, adding to concerns the currency bloc could slip into recession.

The data had limited impact on the euro, but analysts said weak European growth could weigh on the currency versus the dollar in the medium term as the U.S. economic picture improves.

The euro briefly extended losses against the dollar after minutes from the Federal Reserve's latest meeting sparked fresh risk aversion. The minutes showed a few officials in January believed another round of central bank bond buying would be needed before long to support the U.S. economy.

The dollar slipped against the yen to trade 0.2 percent lower at 78.33.

Monetary easing steps from the Bank of Japan on Tuesday had weighed on the Japanese currency and earlier pushed the dollar to a 3-1/2-month high.

The greenback, however, was well above strong support at its 200-day simple moving average, currently around 78.02 yen, having closed above it on Tuesday for the first time since mid-April.

Japan's shrinking current account surplus, its trade deficit and signs of economic recovery in the United States have also knocked sentiment on the yen.

Pierre Lequeux, head of currency management at Aviva Investors in London, which has total assets under management of around 300 billion euros, saw a positive outlook further out for the dollar against the yen, potentially rising to 85 yen in six to 12 months.

The risk-correlated Australian dollar, meanwhile, rose 0.2 percent to US$1.0693. The New Zealand dollar was up 0.3 percent at US$0.8338 after earlier climbing to its highest level since September.

(Reporting By Nick Olivari and Gertrude Chavez-Dreyfuss; Editing by Leslie Adler)