THE euro fell yesterday after a German official suggested a second Greek bailout was not yet certain, but traders said the prospect of higher eurozone interest rates would probably limit the currency's losses.
Policymakers have inched toward a new bailout package for Greece that German media said could exceed €100bn, and that helped the euro hit a one-month high of $1.4658.
It dipped below $1.46 after a spokesman for the German finance ministry said a second aid programme was not yet certain. It was last down 0.1pc at $1.4612.
Greece received a €110bn aid package a year ago. Traders, though, said the market assumes a deal will be reached to allow Greece more time to repay its debt and that markets also were already bracing for ECB President Jean-Claude Trichet to signal, on Thursday, plans to raise euro zone interest rates in July.
"The focus will turn toward interest rate differentials, and with the Federal Reserve unlikely to do anything this year, an ECB rate hike will pull money toward the euro and other currencies," said Boris Schlossberg, head of research at GFT Forex.
"There's no reason whatsoever to own dollars now."
If Mr Trichet uses the phrase "strong vigilance" when talking about inflation pressure, a hint that rates will rise in July, Mr Schlossberg said the euro could retest its 2011 high around $1.4940.
BNP Paribas quantitative currency strategist James Hellawell said short-term momentum indicators pointed to more euro/dollar gains, but this was due to the dollar generating strong bearish momentum rather than a notable improvement in euro sentiment.
The dollar index dipped as low as 73.643 -- a trough not seen since May 5. A recent spate of soft US data has raised concern about the strength of the US economy.
A report on Friday showed a sharp slowdown in job creation, pushing the unemployment rate up to 9.1pc.
With the Fed not likely to lift interest rats for some time, investors should continue to short the dollar, said Faros Trading head of research Dan Dorrow, "especially against capacity-constrained, rising-interest-rate currencies like the Indian rupee and Brazilian real.'' (Reuters)