Euro under pressure as Greek debt talks falter

The euro fell on Monday, hitting its lowest in nearly two weeks against the safe-haven Swiss franc, after efforts to end a deadlock between Greece and its creditors failed over the week-end.

The talks on Sunday lasted less than an hour, suggesting significant differences between the sides. Concerns that Greece could default and leave the euro zone have prompted the first significant bid for safety in German Bunds in six weeks and lifted peripheral euro zone bond yield premiums to their highest in nearly seven months.

Reflecting some of those concerns in the currency derivatives market, the cost of hedging against sharp swings in the euro/dollar over the next one to three months jumped.

Reuters data showed that one-month euro/dollar implied volatility, a gauge of how sharp swings in the currency are likely to be, rose to a 3-1/2 year high of 14.305 per cent. Risk reversals, which measure demand for options on a currency rising or falling — were showing an increasing bias for euro weakness.

The euro fell to 1.0422 Swiss francs, its lowest since June 3, before recovering to trade at 1.0465, flat on the day. Against the dollar, it fell 0.3 per cent to $1.1230, retreating further from last week’s peak of $1.1387.

“The negotiations between Greece and creditors appear to be in a mess and are a key driver for the euro,’’ said Petr Krpata, FX strategist at ING. “Implied volatility has risen and while the Fed is also a key risk factor this week, the euro will continue to be driven by Greek headlines.’’

Eurogroup meet

Euro zone finance ministers will tackle the issue when they meet on Thursday.

The euro’s weakness helped the dollar index edge up 0.2 per cent to 95.167, pulling away from a near one-month trough of 94.322 set last week. The greenback was 0.2 per cent higher against the yen at 123.58 yen.

Dollar bulls will be hoping the Federal Reserve will offer a clear signal on the timing of its first interest rate hike in nearly a decade after its June 16-17 policy meeting.

According to Commodity Futures Trading Commission data, in the week ending June 9, net long positions on the dollar rose to their largest in six weeks to $34.70 billion.

“How the speculative positions are handled will depend how much the market factors in a September rate hike after the Fed meeting,’’ said Koji Fukaya, president of FPG Securities in Tokyo.

“I don’t see big dollar longs being added even if the Fed hints of a September hike, because current positions already look stretched. But we have to remember that going long on the dollar is the trend. With euro/dollar plays possibly saturated, players are turning their attention to dollar/yen,’’ he said.

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