The euro traded flat against the dollar on Tuesday, after earlier hitting a nearly two-week high, as investors' focus turned to the hurdles to implement a bailout package for Greece and its wide-ranging implications for the euro zone economy. Eurozone finance ministers agreed on a 130-billion-euro ($172 billion) bailout for Greece to avert a chaotic default next month after forcing Athens to commit to unpopular spending cuts and getting private bondholders to take bigger losses.
The deal, which had already been largely factored in by the market, essentially bought time for euro zone officials to put new crisis measures for the region in place over the coming months. But it also means that Greece likely will have no economic growth for years.
"A Greek plan is finally in place but risks around implementation remain high," said Bob Sinche, global head of currency strategy at Royal Bank of Scotland in Stamford, Connecticut. Investors, he said, will now have to grapple with a Greek recession and the expansion of the European Central Bank's balance sheet with the next round of the bank's three-year, long-term refinancing operations to be announced next week. Both are viewed as negatives for the euro.
The euro hit a session high of $1.32930 on trading platform EBS, its highest since February 9, after the successful talks on Greece overnight, but then lost momentum. In late afternoon trading, the euro was flat at $1.32420, with near-term support at the day's low of $1.31860.
One-month implied volatility on euro/dollar slipped on Tuesday as the euro posted gains, trading at 10.80 percent. Volatility declined for a fourth straight session, although it was above levels of a week ago when it dropped to single digits. Meanwhile, euro risk sentiment has improved based on the 25-delta risk reversals, but there were trades that favoured a much steeper decline in the euro zone common currency. Overall, there was still anxiety in the options market.
Morgan Stanley, for instance, has forecast euro/dollar to drop to $1.15 by year-end, reflecting a slew of uncertainty, including a Greek recession possibly for many years and further ECB easing. "Euro weakness is likely to stay with us. A bearish euro/dollar call is starting to work out as the market values European monetary union tail risks more realistically," wrote Hans Redeker, global head of currency strategy at Morgan Stanley in London.
Against the yen, the euro hit a three-month high of 106.010 yen on Tuesday, before pulling back. It was last up 0.1 percent at 105.595 yen. RBS' Sinche has reiterated his sell recommendation on the euro against the yen, with stop losses on a two-day consecutive close above 105.70 yen. The dollar was last up 0.1 percent at 79.720 yen, not far from 79.89 yen hit on Monday, a 6-1/2-month high.