Dollar at 20-month high as fears of Greece exit dent euro

The safe haven dollar climbed to a 20-month high against a basket of currencies on Wednesday as fears of a messy Greek exit from the euro zone weighed on the euro and kept the single currency pinned near a recent four-month low.

The euro dipped to around $1.2643 earlier, very close to last week’s four-month trough of $1.2642, and not far from a 2012 low of $1.2624 set in January. A drop below the January low would take the euro to its lowest level since August 2010.

[caption id=“attachment_318524” align=“alignleft” width=“380” caption=“The dollar index rose as high as 81.830 against a basket of currencies, its highest level since September 2010, as investors shunned risk. Reuters”]  [/caption]

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The euro’s drop had accelerated the previous day after Dow Jones quoted former prime minister Lucas Papademos as saying Greece had no choice but to stick with a painful austerity programme or face a damaging exit from the euro zone, a risk he said was unlikely to materialize but was real.

“The (Papademos) comments were like very strong poison, and the market got flung around by them,” said Satoshi Okagawa, senior global markets analyst for Sumitomo Mitsui Banking Corporation in Singapore.

The dollar index rose as high as 81.830 against a basket of currencies, its highest level since September 2010, as investors shunned risk.

The euro was last down 0.1 percent from late U.S. trade on Tuesday at $1.2670. A trader for a European bank in Tokyo said there was persistent euro-selling from U.S. hedge funds.

The single currency pared some of its losses after CNBC reported on its website that Papademos said there are no preparations underway in Greece for possibly exiting the euro.

A trader for a European bank in Singapore said the previous day’s market reaction had seemed a bit overdone anyway. He added that there were some euro bids in the $1.2620 to $1.2600 area.

“I’m surprised that (the) Papademos comment had such an impact. He didn’t actually say much and I think his intention is to put pressure on the voters to vote for the pro-austerity parties,” the trader said.

Market players said a clear breach of the January low could open the way for the euro to fall further.

“There may be some very minor support at the August 2010 low (of $1.2588) but generally, think most market players targeting $1.25,” said Andrew Robinson, FX analyst for Saxo Capital Markets in Singapore.

“The excessive euro short positions on IMM may be a cause for concern in the background,” he said, referring to the record net short euro position held by currency speculators that suggests the euro could bounce if short-covering kicks in.

Markets were keeping an eye on an informal summit of European Union leaders later on Wednesday, where France will push for a joint euro zone bond. However Germany, Europe’s largest economy, opposes the move and continues to champion austerity measures.

The safe haven dollar rose broadly as investors dumped riskier assets and currencies.

The Australian dollar, usually seen as a proxy for global growth, was hit hard and touched a six-month low of $0.9742 . It later trimmed some of its losses, and was last down 0.4 percent at $0.9763.

The New Zealand dollar, another currency that often comes under pressure in times of market stress and when there is heightened uncertainty about the global economy, hit a five-month low of $0.7490.

The greenback, however, sagged against the yen after the Bank of Japan kept its monetary policy unchanged.

While the decision was in line with the expectations of most market players, a small number of participants had been speculating the BOJ could follow up with new easing steps after its monetary easing in April.

The dollar fell 0.4 percent versus the yen to 79.62 yen . T he greenback had risen 0.8 percent against the yen on Tuesday as the yen retreated after Fitch downgraded Japan’s sovereign credit rating.

Market players said Fitch’s rating downgrade was unlikely to have a lasting impact on the yen, since Japan’s government debt is largely funded by domestic investors.

Reuters