Greek uncertainty keeps euro below key resistance

The euro slipped on Monday, running into key chart resistance as uncertainty over how Greece's debt crisis will be tackled kept investors on edge, while the dollar stabilized following a slide late last week.

With trade expected to be lackluster due to a holiday in Britain and United States, most expect the euro to trade below its 55-day moving average of $1.4326.

The single currency, which was last down 0.4 percent at $1.4280, also faces resistance near $1.4369, the top of the cloud on the daily Ichimoku chart, a technical analysis tool popular among traders. Stops are said to be lurking above $1.4350 with light bids seen below $1.42, traders said.

"The market is a bit hesitant about picking up the euro and take it past the mid-May highs of $1.4345 given uncertainty whether Greece will receive its next (aid) tranche from the IMF/EU and whether it can fulfill all the requirements," said Niels Christensen, FX strategist at Nordea.

"There is a bit of tug-of-war going on between the euro and the dollar with softer than expected U.S. data hurting the dollar."

Greek government bond yields rose and yield spreads over German Bunds widened with European Central Bank board member Lorenzo Bini Smaghi issuing a warning against default. He told the Financial Times it was a "fairytale" to think that Greece's debts could be restructured in an orderly way.

That came after German weekly magazine Der Spiegel fanned fears over the weekend Greece might not get the money, saying it might have missed all fiscal targets set by its lenders.

Both Greece and the IMF denied the report, while Greek Finance Minister George Papaconstantinou was upbeat on the budget negotiations.

European Union and IMF officials are expected to deliver their verdict this week and most euro bulls are likely to stay on the sidelines given the current high level of uncertainty.

Latest data from the U.S. Commodity Futures Trading Commission shows that speculators continued to reduce net long positions in the euro in the week to May 24.

Still, speculators were carrying a small net long position, which meant some traders are expecting a rise rather than a fall in the euro/dollar. This was in contrast to mid-2010 when the euro zone debt crisis led to a jump in bearish euro bets.

"The main difference is likely to be that the ECB is not going along with the politicians," Commerzbank said in a note. "Should the IMF really refuse to continue its aid package ...this would constitute a further negative signal and would have an effect on the euro. While the ECB sticks to its position the consequences for the euro will remain limited, though."

Dollar Index Off Two-Week Lows

While worries about the risk of a debt restructuring by Greece continue to cast a cloud over the euro, a recent run of weak U.S. economic data and a drop in U.S. Treasury yields were weighing on the dollar, market players said.

Earlier on Monday, the dollar hit a record low against the Swiss franc of 0.8457 francs on EBS and dipped to a 26-year trough versus the New Zealand dollar.

The dollar index .DXY was flat at 74.935, pulling away from a two-week low of 74.752 on short covering.

"I get the sense that it all hinges on yields. The dollar tends to come under pressure when the market is in risk-on mode and also when U.S. yields are falling," said Koji Fukaya, director of global foreign exchange research at Credit Suisse Securities in Tokyo.

The two-year U.S. Treasury yield dipped to as low as 0.48 percent on Friday, the lowest since early December.

The euro's yield advantage over the dollar based on U.S. and German two-year government bond yields has narrowed in May. But the current level of about 109 basis points is still not far from a peak near 133 basis points hit in early May.

In a sign of the recent weakness of the greenback, the New Zealand dollar hit a 26-year high of $0.8218 on Monday, the kiwi's loftiest level since it was floated in March 1985. The New Zealand dollar later trimmed its gains and last stood at $0.8167, down 0.2 percent on the day.

The dollar held steady at 80.84 yen, and has retreated since hitting a three-week peak of 82.232 yen earlier in May.

Market players said the yen has attracted demand from Asian investors. Foreign investors have flocked to Japanese government bonds in the past five weeks, finance ministry data shows, and market sources say China was among the main buyers.

[Source: By Anirban Nag, Reuters, London, 30May11]

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