NEW YORK (Reuters) - The euro rose against the dollar on Tuesday after better-than-expected German data, but traders said fears about Greece’s finances and Europe’s spreading debt crisis continue to cast a long shadow of doubt.
One day after hitting a two-month low of $1.3968, the euro rose as high as $1.4133 after a report showed German business sentiment was firmer than expected in May. The euro was last trading at $1.4107.
The euro, however, is down 5 percent against the dollar since early May, and traders said the chance that Greece may restructure its debt would keep it under pressure. Markets were also fretting about the finances of Spain and Italy.
“Concern about Spain and Italy might be overblown, but the Greece issue is not going away, and if Greece restructures, that may open the door for Ireland and Portugal.” said Brian Dolan, chief strategist at Forex.com. “So I look at this as a short-term euro recovery.”
A Greek debt default would hurt other peripheral euro zone states and could push Portuguese and Irish debt into junk territory, Moody’s said on Tuesday, warning it would classify most forms of restructuring as a default.
Greece, Ireland and Portugal have received emergency aid from the European Union and International Monetary Fund.
The euro pared gains after the leader of Greece’s conservative political opposition rejected the government’s new package of fiscal measures to slash deficits.
Greece will not be able to honor its obligations without the next tranche of a bailout loan, and the International Monetary Fund has made clear it cannot disburse money if Greece’s 2012 EU funding is not assured, Greece’s finance minister said.
Greece faces a 13.4 billion euro ($18.85 billion) funding crunch next month.
Any Greek debt restructuring plan would open the door to euro selling toward $1.30, analysts said, by hitting European banks and private investors and raising questions about the euro zone’s overall credit-worthiness.
Traders reported stop-loss orders from $1.4125, with more around Monday’s high of $1.4146. Support is seen around the 100-day moving average at around $1.3975. The euro has traded above its 100-day average since February.
Against the yen, the dollar fell 0.1 percent to 81.85 yen. The dollar index, which measures the greenback against a basket of currencies, slipped 0.2 percent to 75.933 .DXY, near a seven-week high set on Monday.
The New Zealand dollar rose 0.8 percent to $0.7977 after a quarterly survey showed inflation expectations rose in the second quarter.
Fears of euro-zone debt contagion mounted after ratings agencies downwardly revised outlooks for Italy and Belgium, while Spain’s Socialist Party loss in regional elections raised doubts about Madrid’s commitment to fiscal austerity.
“Traders now fear this is a sign of things to come, as a national-level electoral turnaround that undoes the austerity measures in Spain, or an outright rating cut in Italy, threatens to bring about a crisis in a country too big to be rescued,” said James Percival, market strategist at Western Union Business Solutions in Victoria, British Columbia.
Despite market worries, though, Spain sold 2.3 billion euros of short-term debt on Tuesday with borrowing costs largely unmoved from the last auction.
Additional reporting by Wanfeng Zhou; editing by Leslie Adler