* Euro falls below $1.42, in range trading mode
* Euro upside capped by Greek debt issues
* Analysts see risk of dollar selling on FOMC minutes (Recasts, adds comment, updates prices; changes dateline, previous LONDON, byline)
By Gertrude Chavez-Dreyfuss
NEW YORK, May 18 (Reuters) - The euro slipped against the U.S. dollar on Wednesday in volatile trade, undermined by some hedge fund and central bank selling, as the outlook remained clouded with Greece’s debt situation still largely unresolved.
There were opposing views on whether or not Greece should restructure its massive debt. Euro zone finance ministers on Tuesday floated the idea of a “soft” restructuring, but the Greek government did not seem keen to adopt their suggestion.
“We’re still very much at the mercy of innuendoes and rumors about sovereign debt in the euro zone. The market is concerned about a debt restructuring in Greece and until that is addressed, we will be in this range-trading mode in the euro,” Dean Popplewell, chief currency strategist, at OANDAsaid.
Traders said early Middle East demand took the euro to a session high of $1.42873 on trading platform EBS, but additional gains were capped, running up against its 55-day moving average around $1.4290.
The single currency, however, could catch fresh bids if Federal Reserve meeting minutes due later this afternoon suggest U.S. interest rates will stay low this year.
In early New York trading, the euro was down 0.2 percent at $1.42100 EUR=EBS.
Shaun Osborne, chief currency strategist at TD Securities thinks the high $1.42s are perhaps as good as it will get for the euro on Wednesday.”
“We retain a broadly bearish bias and continue to think the main near-to medium term risk is for a drop to the 1.36/1.39 range,” he added.
Some analysts argued that a restructuring in Greece would be unlikely at least until European officials are confident the contagion risks to other weak euro zone countries would be low.
In line with euro weakness, the premium investors demand to hold Greek government bonds rather than benchmark German Bunds rose to one-week peaks on Wednesday.
The Greek/German 10-year government bond yield spread GR10YT=TWEBDE10YT=TWEB expanded 29 basis points on the day to 1,305 bps. The bid/ask spread for the 10-year paper was last 336 bps, its highest since June 2010. See [ID:nLDE74H1A0].
Investors also were focused on the minutes of the latest Fed meeting due this afternoon.
They expect the U.S. Federal Reserve will emphasize its determination to keep rates near zero even after it ends its cheap-money policy of quantitative easing in June. An even more dovish stance could prompt selling in the dollar.
Ongoing U.S. fiscal issues are also expected to limit demand in the U.S. currency, which has bounced following a heavy selling trend this month, as investors trimmed overstretched bets to sell the greenback.
“Doubts over the extent to which the recent USD rally washed out extreme short positioning warns against expectations for USD to return sharply lower, but we suspect that the USD Index will head below 75.0 before long,” ING analysts said in a note.
The dollar index .DXY rose 0.2 percent to 75.543, pulling further away from a six-week high around 76.0 hit earlier in the week.
The dollar JPY= traded flat against the yen at 81.36 yen, as the benchmark 10-year U.S. Treasury yield hovered around its lowest in five months. Narrowing U.S./Japanese government bond yields often put selling pressure on the dollar versus the yen.
Additional reporting by Naomi Tajitsu in London Editing by Theodore d'Afflisio