The euro rallied against the US dollar on Wednesday after a Greek government spokesman was quoted saying a planned referendum would ask voters about the bailout, not euro membership. The euro last traded at $1.3756, up 0.5 percent on the day, compared with $1.3749 before the clarification reached investors.
The euro snapped three days of losses against dollar, though it surrendered most gains as a showdown looms between Greece and the monetary authorities that can prevent it from defaulting on its debt. The European Union and International Monetary Fund will not release an 8 billion euro payment to Greece until after the country has held a referendum on the EU's latest bailout programme, a source on the IMF board and an EU source said.
Eurozone leaders last week signed off on the sixth tranche from a 110-billion-euro package agreed for Athens last year, but the sources said the payment was on hold and would not be paid until after the referendum. Without the payment, Greece could face bankruptcy. "It's more uncertainty, more of a hard line and not what we expect after the euphoria of last week," said John McCarthy, director of foreign exchange at ING Capital Markets in New York. "We are coming to some form of showdown between the EU, the IMF and Greece which weakens the euro."
In early afternoon New York trading, the euro was up 0.2 percent at $1.37209, above the three-week low of $1.3608 struck on Tuesday, amid a bout of short covering by real money investors and speculators. It rose to a session high of $1.38294 on trading platform EBS, with near-term resistance around $1.3845 - the 50 percent retracement of the euro's drop from its August 29 high of $1.4550 to a low of $1.3145 on October 4.
Investors are still looking for the positive in news from Europe though analysts continued to caution events were still uncertain. The dollar had earlier pared some losses after the Federal Reserve's Federal Open Market Committee said after meeting that US economic growth strengthened somewhat in the third quarter but investors did not find enough to offset eurozone concerns. Investors interpreted the Fed comments as removing the possibility of further policy easing, at least for now.
"The headline that says household spending increased and overall growth strengthened somewhat was, on the margin, a slight improvement and is giving the dollar a bit of a boost," said Omer Esiner, senior market analyst at Commonwealth Foreign Exchange in Washington. "For now, it seems QE3 is off the table and that will put the focus squarely back on Europe."
Overall Europe's sovereign debt problems remain an overriding concern for many, with the euro still vulnerable to the downside. Investors remained fearful about the risk of Greece defaulting after Prime Minister George Papandreou unexpectedly called for a referendum on a bailout package hashed out at last week's European Union summit. Investors also are looking ahead to the Greek government's confidence vote on Friday. If Papandreou loses the vote, a new general election will be called and most likely there will be no referendum.
But any such outcome is likely to spark renewed uncertainty and increase the chances of a disorderly default by Greece and the risk of contagion to other countries such as Italy and Spain. The dollar lost 0.3 percent to 78.11 yen. Japan sold a record of nearly $100 billion worth of yen on Monday, driving the greenback from a record low around 75.311 yen to a high of 79.55 yen.