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Euro falls before finance ministers meet as Greek deadline looms

THE euro fell for a third day against the dollar before European finance ministers meet on Monday to discuss the financial aid Greece needs to avoid a default.

The single currency extended its slide from a 2 1/2-month high before Greece's deadline Tuesday to pay 750 million euros (US$837 million) to the International Monetary Fund. German Chancellor Angela Merkel is under pressure from her political allies to give up on the debt-ridden country to preserve the 19-nation euro.

"I don't think we'll get very constructive signals on Greece from the Eurogroup meeting," which means there's "downside potential" for the euro, said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG in Frankfurt. "We're expecting euro-zone finance ministers to keep on kicking the can down the road." The euro dropped 0.4 per cent to US$1.1160 as of 7:12 p.m. in New York, after touching US$1.1392 on May 7, its highest level since Feb 23.

Policy Split

The exchange rate will remain under pressure longer term as the European Central Bank's expansionary monetary policy comes up against a Federal Reserve that's widely forecast to raise interest rates before the end of the year, according to Richard Falkenhall, senior currency strategist at SEB AB in Stockholm.

The euro may end this week at US$1.10, before dropping to US$1.05-$1.07 by June 30 and tumbling below parity with the dollar by year-end, Falkenhall predicted.

"It hasn't been easy to find a solution on Greece and this has been negative for the euro," he said.

The single currency is the worst performer among 10 developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes in the past three months, declining 2.7 per cent. The euro fell 0.3 per cent Monday to 133.75 yen.

Short Positions

"The risk may be swinging back to downside in the euro," Greg Gibbs, a Singapore-based strategist at Royal Bank of Scotland Group Plc, wrote in a note on Monday. "Current levels are a decent place to establish a short position anticipating strength in the dollar and US rate hikes toward the second half of the year." A short position is a bet an asset's price will fall.

Members of Merkel's Christian Democratic bloc are openly challenging her policy on Greece, with some officials in Germany's Finance Ministry leaning toward the conclusion that the euro zone would be better off without its most-indebted member.

An accord "will surely not be reached at the Eurogroup meeting on Monday," Dutch Finance Minister Jeroen Dijsselbloem, who's chairing the gathering, told Italy's Corriere della Sera newspaper on May 9. He said more time was needed to reach an agreement.

It's not all bad news for the euro, though. The region's economy grew 0.4 per cent in the first quarter, up from 0.3 per cent in the final three months of 2014, according to a Bloomberg survey before the May 13 report.

"It'll be hard for the euro to gain much more after Dijsselbloem," Toshiya Yamauchi, a senior analyst in Tokyo at Ueda Harlow Ltd., a margin-trading services provider, said in a note. If, on the other hand, gross domestic product data this week show there's growth in the euro zone, then "it's possible the euro will continue to be bought back."

BLOOMBERG