* Euro zone service sector PMI eases recession fears
* Euro rises to near 3-week high vs dollar, 4-week high vs
* Greek debt negotiations stall but hope for deal still
By Nia Williams
LONDON, Jan 24 The euro slipped after
hitting a near three-week peak versus the dollar in choppy trade
on Tuesday, as concerns over the outcome of talks to avert a
messy Greek default outweighed the impact of a
better-than-expected survey of the euro zone service sector.
Surveys showed the euro zone may yet escape recession thanks
to a surprise upturn in the service sector which offset ongoing
contraction in manufacturing this month, briefly pushing the
euro to the day's highs.
The single currency rose to $1.3063 on trading
platform EBS, its highest level in nearly three weeks, before
falling back to $1.2997, down 0.2 percent on the day. Traders
cited strong selling by a hedge fund that pressured on the euro.
Uncertainty over Greece's ability to avert a chaotic default
contributed to increased market volatility after euro zone
finance ministers sent back a Greek debt swap offer, saying the
coupon demanded by bondholders was too high.
Private creditors have said a 4.0 percent coupon is the
least they can accept if they are going to write down the
nominal value of the debt they hold by a half.
"Euro zone PMIs probably helped but we are not trading the
euro on growth prospects. We are more worried about the
structural implications of the euro crisis and the headlines we
are waiting for with regards to Greece and a PSI (private sector
involvement) deal," said Carl Hammer, chief currency strategist
The euro held well above its 17-month EBS low of $1.2624 hit
on Jan. 13. Topside resistance was at $1.3077/1.3100, the Jan. 3
high and a 38.2 percent retracement of the November-January
slump. Traders said a break above the October EBS low of $1.3145
was still needed to turn the technical picture positive.
IMM speculative positioning data shows an extreme short
position in the euro, which leaves it vulnerable to pullbacks,
but market participants were sceptical over the sustainability
of any rallies.
"Sooner rather than later sellers will appear again,
although there is a bit more short covering to happen before we
will continue a euro downtrend," said SEB's Hammer.
The euro was pressured by suggestions that Portugal, seen as
the second most risky country in the euro zone, could be the
next potential default candidate after Greece.
Germany also tempered optimism by denying a report that it
was ready to boost the combined firepower of the euro zone's
rescue funds to 750 billion euros ($979 billion).
Despite the better PMI surveys, many market players expect
the euro to endure a prolonged period of sluggish growth,
forcing the European Central Bank to keep interest rates low.
Jaco Rouw, senior currency strategist at ING Investment
Management, said the ECB's stance in providing long-term
low-rate funding for European banks meant the euro had become
the funding currency of choice.
"The euro region will be one of the weakest in the world, it
will see a recession. Rate cuts will make the euro a more
attractive funding currency," Rouw said.
Against the safe haven Swiss franc the euro fell to a
four-month low of 1.2057 francs with traders reporting
bids at 1.2050-40 francs.
BOJ ON HOLD
Against the yen, the euro hit a near four-week high of
100.84, moving further away from an 11-year EBS low
of 97.04 marked on Jan. 16. Traders cited Japanese importer
demand triggering stop-losses around 100.50.
The dollar rose to a near four-week high of 77.39 yen
in a move which traders said was largely driven by euro/yen
demand. Reaction was muted to the Bank of Japan's widely
expected decision to hold policy steady at its regular meeting,
as well as cut its economic forecasts.
Waning risk appetite pressured commodity currencies, with
the Australian dollar slipping 0.6 percent to $1.0466,
off a 12-week peak of $1.0574 set on Monday.
Investors also awaited the outcome of the Federal Reserve
policy meeting that starts later 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.