Euro Falls as Greek Deal Optimism Tempered by Creditor Pushback

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The euro fell as Greek attempts to reopen negotiations with creditors faced pushback, extending weeks of mixed signals about the nation’s future in the currency bloc.

The 19-nation currency fell versus most of its major peers as German Chancellor Angela Merkel refused to engage until after Greece’s July 5 referendum. The euro weakened against the dollar for a second day as a private payrolls report showed American companies boosted employment in June, supporting Federal Reserve moves to raise rates this year as Europe maintains unprecedented stimulus.

“The uncertainty around Greece persists,” said Peter Dragicevich, a foreign-exchange strategist at Commonwealth Bank of Australia in London. “We’ve got the Fed looking to raise rates later this year and obviously the European Central Bank’s only a few months into a program, which is set to run into September of next year, so that divergence is still in place and it should see the euro drift lower.”

The euro dropped 0.6 percent to $1.1079 as of 12:48 p.m. New York time and fell 0.1 percent to 136.35 yen. Bloomberg’s Dollar Spot Index, which tracks the greenback versus 10 of its major peers, rose 0.6 percent to 1187.94.

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Greek Twists

The euro leaped, for a moment, after Greek Prime Minister Alexis Tsipras said in a letter to creditors that he accepted their reform proposals as the basis of a compromise. Tsipras is encouraging Greeks to vote ’no’ in the referendum, saying this will help the nation get a better deal.

The currency quickly resumed its downward path as Merkel said any negotiations will have to wait until after the referendum on austerity measures. German Finance Minister Wolfgang Schaeuble said Greece has provided “no basis for talking about any serious measures” to break the deadlock.

“There isn’t much clarity right now with regards to what Greece is looking to do,” said Eric Viloria, a strategist at Wells Fargo & Co. in New York. “Any strength that we would see in the euro coming from any sort of positive news from Greece we would expect to be temporary, because then the focus would shift back to the long-term economic and monetary policy trends.”

The euro has remained remarkably buoyant throughout the crisis, gaining for three of the past four weeks, and has often moved counter-intuitively, rising as the situation worsens before falling as Europe’s most-indebted nation seems to be edging closer to a deal with its creditors.

Direction Changes

“It does appear the euro is moving in the opposite direction to risky assets at times,” said Richard Kelly, head of global strategy at Toronto-Dominion Bank in London. “What could possibly explain those counter-intuitive moves is hedges people put on, or unwind, on euro-denominated assets such as equities.”

Some investors are also setting news on Greece to one side and refocusing on the diverging economic fundamentals and monetary policies of Europe versus the U.S.

American companies added more jobs than forecast in June, boosting hires by 237,000, the most since December, figures from the ADP Research Institute in Roseland, New Jersey, showed Wednesday. Government data will probably show a similar trend when it’s released Thursday, with 233,000 nonfarm payrolls added in June, according to a Bloomberg survey of economists.

The Fed is weighing such data as it looks to raise rates this year. Futures show a 35 percent chance the central bank will increase its benchmark rate from near zero in September and a 72 percent chance by December, according to data compiled by Bloomberg.

“The market should be far more focused on nonfarm payrolls than it’s focused on Greece,” said Richard Benson, co-head of portfolio management at Millennium Global Investments Ltd. in London. “We’re strong believers in the cyclical difference between the euro zone and the U.S., and that being a driver for currency returns.”

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