The euro was little changed, oscillating just below an eight-week high as markets awaited news on Greece's efforts to forge political consensus on a debt and bailout agreement needed to avert default.
In Athens, government officials and opposition parties worked to bridge differences on a menu of economic and budgetary reforms being demanded by international lenders. However, political support has been elusive, and weeks of around-the-clock talks have yet to produce an accord between Greece and its private bondholders, who are being asked to take a sizeable write-down on their holdings.
The common currency jumped to its highest levels since December 12 on news that the European Central Bank – which has been snapping up Greek debt for much of the last year in an effort to counteract selling pressure driving up borrowing costs – may include its bonds in the debt restructuring, people briefed on the issue told the Wall Street Journal.
But confusion reigned about whether Greece's sharply divided political establishment could narrow their differences, prompting investors to move to the sidelines. Greece must have a bond deal in place by early next month, or risk sliding into a default that could unleash contagion across the 17-nation currency bloc and perhaps force the Hellenic republic out of monetary union.
"The market is lacking clear signals on Greece," said Richard Franulovich senior currency strategist at Westpac Banking Corp. in New York.
An eventual deal is "increasingly priced in, and at a minimum these [negotiations] should limit the downside for the euro," Franulovich said. Because many investors still maintain bets the euro will fall, an unwinding of these positions could carry the euro back up to $1.35 "before we reassess what's going on," he added.
In late-afternoon trade, the euro was at $1.3258 from $1.3261 late Tuesday. The dollar was at ¥77.05 compared with ¥76.77, while the euro traded at ¥102.15 from ¥101.80. The pound bought $1.5815 compared with $1.5898, while the dollar fetched 0.9128 Swiss franc from 0.9118 franc.
The ICE Dollar Index, which tracks the dollar against a trade-weighted basket of currencies, was at 78.62, up 0.1% late Tuesday.
The yen extended its declines after the Japanese government reported that the current account surplus shrank at a record 43.9% pace last year, as a strong yen crimped export demand and energy imports surged. Analysts say the diminution of Japan's trade competitiveness could be bearish for the yen in the long run.
Over the last several months, the yen has been boosted by a mass flight-to-quality from investors fleeing Europe's debt crisis and loose monetary policy in the U.S. Yet traders shunned the currency after the Bank of Japan disclosed Tuesday that it had conducted surreptitious yen-selling last November—immediately following a public intervention.
The news kept the market on-guard for more central bank action to weaken the currency.
"Senior Japanese officials have warned about JPY strength against both the dollar and euro in recent weeks," wrote Simon Derrick, senior strategist at Bank of New York-Mellon in a research note Wednesday. "We can therefore not rule out the possibility that an operation in the coming weeks could prove to be against the single currency as well. Forewarned is forearmed."
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