Euro heads for quarterly gain as Greek standoff clouds outlook

[NEW YORK] The euro headed for its first quarterly gain versus the dollar since early 2014, even as Greece stepped closer to the brink.

Volatility increased and the single currency dropped versus most of its major peers as Greece looked set to miss a payment to the International Monetary Fund and leave the protection of Europe's bailout regime. The euro remains poised for a monthly and quarterly gains, proving remarkably resilient in the face of a possible Greek exit from the currency bloc.

"There's still a lot of ambiguity" on Greece, Sireen Harajli, a strategist at Mizuho Bank Ltd. in New York, said by phone. "If the situation gets out of control, then we'll see the euro at much weaker levels. Where it is today is more a reflection of some month-end and quarter-end flows."

The euro was little changed at $1.1236 as of 9:13 am New York time. It has gained 2.2 per cent this month and appreciated 4.7 per cent this quarter.

One-month implied volatility on the euro against the dollar, a measure of bets on future price swings, rose for a third day. The gauge increased to 13.93 per cent, after touching 15.32 per cent Monday, the highest level since December 2011.

While there's no rule to say Greece would have to leave the euro if it skips the IMF payment or fails to extend its financing arrangements, it may prove difficult to stay in if, for example, the country has to start printing its own currency to keep its financial system afloat.

European Commission President Jean-Claude Juncker was said to have contacted Greek Prime Minister Alexis Tsipras Monday and set out details of how a bailout accord could still be reached, according to a European Union official, who asked not to be identified because the talks are private.

Mr Tsipras dared European leaders to throw his nation out of the monetary union after calling a referendum on their conditions for aid.

"What happened has extended the will-they-won't-they saga," said Derek Halpenny, head of European markets research at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. "The whole thing is very fluid."

That's leaving many investors looking to European Central Bank President Mario Draghi, who pledged in 2012 to "do whatever it takes" to defend the euro. The region's central banks began a program of euro-area debt purchases, known as quantitative easing, in March.

After its recent gains, the euro is also under pressure from monetary-policy divergence as the Federal Reserve moves closer to raising interest rates, said Eric Stein, who manages the Global Macro Absolute Return Fund in Boston at Eaton Vance Corp.

The Bloomberg Dollar Spot Index, which tracks the US currency versus 10 of its major peers, rose 0.1 per cent to 1,177.78 Tuesday. The gauge has fallen 1.9 per cent since March 31, set for its first quarterly decline in a year. It's down 1.2 per cent from a month earlier.

"The dollar's recent moderation should give the Fed more confidence it can begin the path of slowly hiking interest rates," Eaton Vance's Stein said.

BLOOMBERG