Euro falls in London

The euro fell against the dollar on Thursday as concerns resurfaced about the risk of a chaotic default in Greece, offsetting earlier supportive comments from Chinese premier Wen Jiabao. The euro fell around 0.5 percent to a session low of $1.3085, with traders citing a media report that Eurogroup head Jean-Claude Juncker said debt swap talks with Greece were very difficult and recent steps to address the debt crisis were insufficient.
The euro cut earlier gains after China's Wen said the country was considering greater involvement in the European Financial Stability Facility (EFSF) and its successor, the European Stability Mechanism (ESM). "There is still the prospect that Greece will go through a messy default on March 20, and on top of that, Portugal could be next to come to boiling point," said Jane Foley, senior currency analyst at Rabobank.
"There hasn't been an awful lot of follow-through from China from this sort of talk before, so the market after the initial headline began to view it with some scepticism," she added. Traders highlighted the fact that Wen tempered his comments, saying Europe must rely on itself, reduce its debt load and introduce structural reforms. He also said China was still researching how to participate in the EFSF and ESM.
Analysts said although greater support from China would be helpful, it was not a game-changing event for the euro zone, and the progress of talks to avoid a disorderly Greek default was more significant in the near term. The euro remained within its range of the last week, roughly between $1.3230 and $1.3020. Analysts said a Greek deal could push the euro to break higher, but any rally may only be temporary.
Investors are also concerned Portugal could need a second bailout or even follow in Greece's footsteps and demand a debt haircut, after yields on Portuguese government debt reached euro-era highs earlier this week. Decent demand at French and Spanish auctions had little impact, with market players attributing recent successful euro zone debt auctions to the European Central Bank's injection of nearly half a trillion euros of cheap funds.
Trends in FX options suggested investors were increasingly concerned about the risks of the euro sliding further. Euro/dollar risk reversals showed the premium to buy bets on euro falls has risen steadily from lows hit in mid-January, while a trader reported demand to buy six-month to one-year options with strikes in the low $1.20s. The dollar dipped 0.1 percent to 76.10 yen, sticking near a three-month low of 76.027 yen hit on Wednesday on trading platform EBS and keeping alive concerns that Japanese authorities may intervene to curb yen strength.
The dollar has been edging closer to a record low of 75.311 yen hit on October 31, when Japan intervened to curb yen strength. The US currency has been under pressure against the yen since Federal Reserve said last week it was likely to keep interest rates near zero at least until late 2014. Federal Reserve Chairman Ben Bernanke will give a testimony on the state of the US economy later in the session and market players will watch for any signs the central bank may be edging closer to implementing a further round of quantitative easing.