FOREX-Euro drops vs dollar, yen; awaiting word on Greece deal
* Euro falls from 7-mth high vs yen
* Germany deputy finance minister sees Greece deal on Monday
* Resumption of U.S. fiscal cliff talks also eyed
By Julie Haviv
NEW YORK, Nov 26 (Reuters) - The euro dropped against the dollar and retreated from a seven-month high versus the yen on Monday as market participants pared bets in favor of the single currency as they awaited word on whether Greece will secure crucial loans needed to pay off its debt.
Euro zone finance ministers and the International Monetary Fund began their third attempt in as many weeks to release emergency aid for Greece, with policymakers saying a write-down of Greek debt is off the table for now.
Germany's deputy finance minister said he expected Greece's international creditors to strike a deal later on Monday on unfreezing loans for the heavily indebted country.
The euro was last down 0.5 percent at 106.38 yen, having hit 107.135 yen on trading platform EBS in Asian trade, the single currency's strongest level since late April.
"The market has been quite long euro/yen so it is quite natural that dollar/yen has had a bit of a pullback where euro/yen has done the same," said Daragh Maher, currency strategist at HSBC.
"I don't think there is any conviction in selling the euro as you may have some kind of announcement on Greece, which will probably see a pop higher."
A Greece deal could give the euro a fillip, especially against the struggling yen which has been under pressure in the past few weeks on mounting speculation a new government after next month's general elections will force the Bank of Japan to ease monetary policy aggressively.
Against the dollar, the euro was last down 0.1 percent at $1.2958, having hit $1.2991 on Friday, its highest since late October.
The dollar was weaker against the yen, trading 0.4 percent lower at 82.08 yen, with some investors unwinding long positions that have been built in recent weeks. There was talk of persistent buying from hedge funds for dollar/yen call options that expire in three to six months, suggesting they are bullish on the dollar and bearish toward the yen.
Expectations of a deal for Greece overshadowed an election victory for separatists in the Spanish region of Catalonia on Sunday.
HSBC's Maher said Greece was the main concern and with no sign of a referendum on independence in Spain for the next year at least, the euro was likely to retain its recent gains.
This week's focus is likely to turn back toward the U.S. "fiscal cliff" as European data flow is limited and unlikely to jolt markets, although European Central Bank President Mario Draghi speaks on Friday, according to Camilla Sutton, chief currency strategist at Scotiabank in Toronto.
"Leading into the Dec. 6th interest rate decision the ECB is likely to sound increasingly dovish; which could put some downward pressure on the euro; however the euro is more likely still range bound between $1.26 and $1.32 as Fed policy continues to counteract ECB policy," she said. "We hold a year-end target of $1.27."
The dollar index, which tracks the greenback against a basket of currencies, was last up 0.1 percent at 80.252, hovering close to a three-week trough of 80.128 plumbed on Friday. Traders said budget talks in the United States would hold sway for the dollar in the near term.
The White House and Congress are set to resume negotiations this week to avoid $600 billion of automatic tax hikes and spending cuts in January that are known as the 'fiscal cliff'. Analysts fear if those are allowed to kick in, they could tip the world's biggest economy into recession.
Geoffrey Yu, currency strategist at UBS, said he expected a "stop gap solution" to the fiscal cliff by the end of the year, which would bolster the dollar.
"A resolution clears a major event risk and probably means cuts will not be aggressive either, which would support U.S. yields because of increased confidence in growth," Yu said.
He added that a swift resolution on the U.S. fiscal cliff and a Greek aid deal could help lift riskier currencies although it would not be as much of a market-moving event as similar talks last year on the U.S. debt ceiling.