NEW YORK (Reuters) - The euro edged slightly lower against the U.S. dollar after hitting a two-month high on Wednesday as investors awaited firm signs Greece will reach a deal on a second international bailout.
Europe’s common currency shuttled between small gains and losses throughout the afternoon New York session as Greece’s debt talks dragged on. The market has become driven mainly by headlines out of Europe, similar to what happened late last year.
Prospects of a deal on a second international bailout for Greece rose when euro zone finance ministers were summoned to talks in Brussels while Greek political leaders met to approve a tough reform and austerity program.
Greece’s leaders must agree to the terms for the new 130 billion euro ($172.3 billion) rescue which Athens needs to avoid going bankrupt next month when big debt repayments are due.
“There seems to be progress on Greece, but there is no definitive outcome so people are hesitant to push the euro higher,” said John Doyle, director of markets at Tempus Consulting in Washington.
He added that there were sellers of the euro between $1.3250-$1.3275.
An agreement on a second bailout would likely offer only a short-term boost to the euro given ongoing uncertainties about Greece and other euro-zone economies.
Greece will likely fail to achieve sustainable debt levels if it only resorts to a 70 percent reduction in the value of bonds held by private creditors, Standard & Poor’s warned on Wednesday, putting pressure on the ECB to also take losses.
In late afternoon New York trade, the euro was down 0.1 percent at $1.3254 after earlier rising to $1.32890, its highest level since December 12 on trading platform EBS.
News that Italy’s economy likely contracted in the fourth quarter also weighed on the euro.
S&P also warned that credit conditions continue to deteriorate in Italy and France after it downgraded both countries last month, despite extraordinary steps by the ECB to boost liquidity in the market.
The intraday bias on the euro remained positive, with resistance at the 100-day moving average around $1.33339, while option-related offers were reported ahead of $1.3300.
“We expect the Greece euphoria to fade; while the central bank supported risk trade will be tested by tomorrow’s ECB (European Central Bank) meeting,” said Camilla Sutton, chief currency strategist at Scotia Capital in Toronto.
As long as the ECB remains firmly against U.S.-style quantitative easing, its policies on a relative basis are likely to support the euro, she said.
“We underestimated the amount of upside still to be priced in over Greece and the violence of short covering that might follow; accordingly we were stopped out of our short EUR trade yesterday.”
Sutton said their medium term forecast remains at $1.25
Both the Bank of England and the European Central Bank hold monetary policy meetings on Thursday.
“We expect no change in the policy rate and no announcement of further easing measures from the ECB,” said Mark McCormick, currency strategist at Brown Brothers Harriman in New York.
“However, we do expect the BoE to announce another round of QE (quantitative easing), though it remains possible that this decision is not unanimous,” he added.
ECB President Mario Draghi may possibly provide some insight into the bank’s willingness to participate in the Greek debt restructuring, he said.
“We believe the combination of a dovish Fed and reduction in the euro zone risk premium could see the euro test $1.34-1.36 on a convincing break of $1.325.”
Against the yen, the euro hit a seven-week peak of 102.43 and was last up 0.2 percent at 102.06 yen. Traders said the outlook was positive while above support around 101.46, the base of the Ichimoku cloud, a closely-watched Japanese indicator.
The dollar was last up 0.3 percent against the yen at 77.04. News that Japan’s current account surplus shrank sharply to a 15-year low in 2011 weighed on the yen.
Additional reporting by Gertrude Chavez-Dreyfuss in New York; Editing by Andrew Hay