Currency traders are taking Greece’s bailout agreement as a green light to sell the euro.
The single currency tumbled by the most in almost three weeks amid speculation a Greek deal will produce enough calm for the Federal Reserve to raise U.S. interest rates this year. The euro reversed earlier gains as investors digested the fact that the agreement still needs the approval of several national parliaments, including Greece’s, before formal bailout negotiations can start.
“It certainly looks like they’re much closer to resolution, which should put some downward pressure back on the euro,” Jennifer Vail, head of fixed-income research in Portland, Oregon, at U.S. Bank Wealth Management, said by phone. “It brings us back to our original forecast on dollar strength,” said Vail, whose company manages $126 billion.
The euro was also put under pressure as a rally in European stocks created demand for hedges against currency losses. The agreement on Greek aid will come as some relief to investors after six months of negotiations pushed the nation to the brink of leaving the euro zone.
The euro dropped 1.4 percent to $1.1002 as of 5 p.m. New York time, after a 1.1 percent gain on July 10. It slipped 0.8 percent to 135.82 yen, paring Friday’s 2.3 percent jump.
“In the absence of Grexit, the Fed’s rate hike in September or December looks like a done deal,” said Jim Leaviss, a London-based money manager at M&G Investments, which oversees $400 billion. “The dollar will be on a strengthening trend against the euro.”
The 19-nation currency, which has already weakened 9.1 percent against the dollar this year, is likely to continue depreciating as the European Central Bank pours unprecedented amounts of cash into the continent’s economy, said Ian Stannard, head of European foreign-exchange strategy at Morgan Stanley in London. The ECB meets July 16.
Implied volatility in the euro-dollar exchange rate subsided by the most since February on Friday as an end to the Greek turmoil looked to be in sight. The three-month gauge of anticipated price swings fell further on Monday to 11 percent, down from a three-year high of 13.1 percent on June 29.
After 17 hours of negotiations in Brussels, Greek Prime Minister Alexis Tsipras surrendered to European demands for immediate action to qualify for as much as 86 billion euros ($95 billion) of aid needed to keep his country in the currency union. He has until Wednesday to pass into law key creditor demands.
“We think euro-dollar will trade lower into the end of the year and retest the lows that were seen back in March,” Brian Daingerfield, a currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, said by phone. The euro sank to an intraday low of $1.0458 on March 16, the lowest since 2003.
“Investors are looking for opportunities to re-enter trades that are backed by strong fundamentals, and I think one of those is still euro-dollar downside,” he said.