* Euro retreats from seven-week high versus dollar
* Talk of European central bank diversifying out of euro
* Euro zone policymakers seen making slow progress
NEW YORK, Aug 24 The euro fell against the
dollar on Friday after Thursday's rally to a seven-week high, as
investors debated the outlook for the currency and how close
policymakers really are in tackling the European debt crisis.
Sources told Reuters on Thursday Spain is in talks with euro
zone partners over conditions for aid to bring down its
borrowing costs, though the country has not made a final
decision to request a bailout.
While this implied there would be no rapid progress in
resolving Spain's debt problems, some strategists said the talks
are positive for the euro as they could open the door for the
European Central Bank to intervene in the bond market.
The euro remained pressured after German Chancellor Angela
Merkel said on Friday after meeting Greek premier Antonis
Samaras in Berlin that Germany would not judge his country's
performance on its reform targets prematurely, but would await a
report by the "troika" of international lenders due next month.
Greek Prime Minister Antonis Samaras said his country does
not want more money from its euro zone partners, just time to
breathe so that it can return to growth. Investors had already
expected little discussion of flexibility on Greek austerity
measures before September.
"The euro is softer across the board as German Chancellor
Merkel hosts Greek Prime Minister Samaras in Berlin," said Eric
Viloria, senior currency strategist at Forex.com. "Merkel
indicated that the talks with Samaras were a 'good beginning',
but won't make a premature judgment on Greece until the Troika
The euro has rallied strongly this week on
speculation the ECB will unveil plans to help lower Spanish and
Italian bond yields at its next policy meeting on Sept. 6.
Viloria noted that Spanish 10-year yields are higher after
the European Union reiterated it has not received a request for
a full bailout from Spain and that it remains focused on bank
aid for the country.
The euro was last trading at $1.2508, down 0.4 percent and
below Thursday's peak of $1.2589, its highest since early July.
Despite Friday's losses, it has gained 1.4 percent this week,
its best weekly performance on a percentage basis since February
26 at current prices.
"After three particularly good days it would not surprise me
today if we have a bit of a pullback to get better levels to buy
in," said Daragh Maher, currency strategist at HSBC.
"The market still seems to be a bit more optimistic - or at
least a bit less pessimistic - on the euro and we've been
getting a slow but relentless closing of shorts."
Maher said with little obvious near-term technical
resistance the euro could extend its short squeeze higher to
$1.27 before the next ECB meeting, as investors who earlier bet
against the single currency closed their positions.
The common currency also lost ground against the Swedish
crown and the British pound on talk of
selling by a European central bank that has been actively
diversifying its euro holdings into other currencies.
Some strategists said the euro is likely to trade in a
$1.23-1.27 range in the coming weeks as investors gear up for
crucial developments next month.
After the ECB meeting on Sept.6, there are Dutch elections
and a German Constitutional Court ruling on the euro zone rescue
fund on Sept. 12 and an EU finance ministers' meeting starting
on Sept. 14.
"It is not a bullish euro story given all the events next
month. But the U.S. is not looking good either. So we are
looking at buying other currencies like the Swedish and
Norwegian crown and selling the euro," said Stuart Frost, head
of Absolute Returns and Currency at fund managers RWC Capital.
The dollar was flat at 78.49 yen.
The Australian dollar fell to a four-week low against
the U.S. dollar, hurt by concerns over slowing growth in China
and continuing debate whether the country's mining boom was
coming to an end.