The euro dipped to a two-month low against the dollar on Tuesday after the eurozone and the International Monetary Fund failed to agree on a long-term plan to reduce Greece's debt, preventing disbursement of immediate aid to Athens. The currency was also bruised by the broader risk averse mood as Chinese shares tumbled following state media reports that government housing market curbs will remain in place, sapping optimism that the world's second-largest economy was regaining traction.
While market players expect Greece to manage to get by this week without the aid money it was counting on, uncertainty over its short-term financing and long-term debt reduction plan was enough to put off investors. "Few people would think that the euro zone will desert Greece. Still, the market will be frustrated by lack of a clear picture. I expect the euro to keep falling gradually," said Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank.
With the aid funds from international lenders blocked, Greece plans to sell treasury bills on Tuesday to refinance a 5 billion issue maturing on Friday. But some market players are not sure if they can take a successful auction for granted. "Although the market was indeed not expecting progress this time, there remain concerns about Greece's funding, putting pressure on the euro," Masafumi Yamamoto, chief FX strategist at Barclays in Tokyo, wrote in a note to clients.
The euro fell to as low as $1.2673, having erased about four-fifths of its gains made after the European Central Bank unveiled a programme to buy government bonds with aim to buy Spanish debt on September 6. It last stood at $1.2684, down 0.2 percent on the day, having constantly declining since it peaked at $1.3140 mid-October as the euphoria over the ECB's scheme faded. Against the yen, the common currency fell to one-month low of 100.42 yen and last stood at 100.61 yen, 0.4 percent below late US levels.
The dollar index, a measure of the dollar against a basket of six major currencies, rose to 81.20, its highest level since early September. On the daily Ichimoku chart, the index rose above the top of the cloud, which stood at 81.054, in a major bull signal for the index.
But market players also said the fiscal cliff could haunt the dollar, if investors start betting the Federal Reserve will take easing steps to counter the effect of the fiscal cliff. In such case, the dollar's weakness may become notable particularly against the yen, which often tends to outperform when risk appetite wanes because of Japan's net creditor status.
The dollar fetched 79.43 yen, little changed on the day and off three-week low of 79.07 yen. The US currency briefly rose to 79.64 yen on speculation Japanese Prime Minister Yoshihiko Noda may soon dissolve the parliament and hold a snap election by the end of year. Opinion polls have shown the conservative opposition Liberal Democratic Party, whose leader Shinzo Abe is seen as putting more pressure on the Bank of Japan to ease its policy, is in the lead.
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