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 The drop in Bund yields and the euro came after the European
Central Bank left emergency liquidity for Greek banks at current
levels but increased the haircuts on the collateral it demands. That
kept alive fears Greek banks will soon run out of cash and that
Greece's problems will spread to other southern European countries.
Traders said the next 24 hours could be crucial. Euro-area leaders
and finance ministers are meeting in Brussels to discuss Greece and
a lack of progress could put pressure on the euro.
European Commission President Jean-Claude Juncker told the European
Parliament on Tuesday Greece's government must come forward with
proposals to resolve its debt crisis. He said he still opposed calls
for Greece to exit the euro.
Since Athens missed a debt payment to its creditors and Greek voters
rejected tough conditions for further bailouts, the euro has
retreated from its mid-June highs of $1.14, but there has been no
panic selling. One reason is expectation the ECB will take action,
including more quantitative easing, to stabilise the market.
Against the dollar, the euro fell to $1.0946, a five-week low, while
the dollar index rose 0.7 percent to 96.903, a one-month high.
"It is a drift lower for the euro," said Jeremy Stretch, head of
currency strategy at CIBC World Markets. "The markets are reasonably
relaxed at this stage because they believe the ECB will step in to
take action to contain any contagion, should Greece step out of the
union."
Despite the euro's resilience, doubts about Greece's future in the
euro zone and its crippled finances cloud the currency's long-term
prospects, analysts said.
Meanwhile, commodity currencies fell sharply, with the Australian
dollar hitting a six-year low as Chinese stock markets went into a
tailspin while oil producer Norway's crown struck a six-month low
after a sell-off in crude oil.
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The Australian dollar, which is a proxy for Chinese investments,
fell 1 percent to $0.7417, with a drop in iron ore prices also
weighing, traders said. The New Zealand dollar also hit a five-year
low of $0.6620.
The Norwegian crown fell 0.7 percent against the euro to 9.01 crowns
its weakest since mid-January. The Canadian dollar, which also has a
strong correlation to oil, hit a three-month low of C$1.2732 against
its U.S. counterpart.
"The drop in crude oil over the past week has materially weighed on
the Canadian dollar," ING analysts said in a note.
"The domestic outlook has also failed to lend support; the soft GDP
print and disappointing second-quarter business outlook figures have
increased the pressure on the Bank of Canada."
(Editing by Catherine Evans/Ruth Pitchford)
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