The euro hit a seven-year low against the pound on Wednesday before a euro zone finance ministers' meeting that will discuss Greece, with any failure to find common ground on the country's debt burden likely to see volatile trading. The dollar, meanwhile, hit a one-month high against the yen, bolstered by a rise in Treasury yields. Trade was thin, with Japanese markets closed for a public holiday.
Greek Finance Minister Yanis Varoufakis will present to the Eurogroup of euro zone finance ministers Greece's demands for an end to its international bailout and a transition to a new debt restructuring deal. At his first such meeting, he will seek a "bridge agreement" to buy time until June for a full settlement. The euro moved higher on Tuesday on optimism a compromise can be reached, which would be more acceptable to markets than Greece exiting the euro zone. Any suggestion of talks breaking down could see a sell-off in the euro.
Against the dollar, the single currency fell 0.25 percent to $1.1295. It shed 0.4 percent against the pound to hit 73.85 pence, its lowest in seven years. "Greece is centre-stage and the Greeks are likely to present a plan that has met with resistance. So there is a downside risk for the euro and any rallies into $1.1360 will be sold," said Jeremy Stretch, head of currency strategy at CIBC World Markets. "Also, we have a bid on the dollar on increased Fed rhetoric about hawkish monetary policy."
Richmond Fed President Jeffrey Lacker, an inflation hawk, said on Tuesday that a June hike was an "attractive option" while San Francisco Fed President John Williams said economic conditions are "getting closer" to the point where it made sense to think about starting to normalise policy. The dollar rose 0.4 percent to 119.95 yen, its highest level in a month. Helping the dollar was a rise in the benchmark US 10-year Treasury yield, which popped above 2 percent on Tuesday for the first time in a month on views the Fed might lift interest rates by mid-2015.
The dollar's near-term moves against the yen are likely to be driven more by Fed rate rise expectations, traders said. "US two-year swap rates are now back to their highs above 0.90 percent as investors price the first hike in June," said Chris Turner, head of currency strategy at ING. "The dollar index should stay bid and push through 95 in the near term." The dollar index was up 0.1 percent at 94.895.