Euro gains but seen susceptible to Greek debt

A man is reflected on an electronic board displaying exchange rates in a business district in Tokyo May 16, 2011.

NEW YORK (Reuters) - The euro gained against the dollar in choppy trading on Tuesday, but remains susceptible to losses related to how Greece might restructure its massive debt.

Europe's top financial officials broke a taboo on Tuesday and acknowledged for the first time that Greece may have to restructure its debt, a move which could stoke Europe's sovereign debt crisis.

Speaking on the sidelines of an EU finance ministers' meeting, Jean-Claude Juncker, chairman of the 17-country Eurogroup, said there was a need to move toward what he called a "soft restructuring" of Greek debt.

"There was really nothing fundamental today that would drive the euro higher as the headlines out of Europe were not positive," said Vassili Serebriakov, currency strategist at Wells Fargo in New York. "U.S. equities and oil both bounced off their lows and so the euro's turnaround is actually not that surprising."

European finance ministers approved a financial aid package for Portugal on Monday, but Greece's debt situation has remained a significant wild card. A restructuring of Greece's debt could erode the euro zone's credibility with investors.

Key European Union officials including German Chancellor Angela Merkel are vehemently opposed restructuring any euro zone country's debt. Merkel on Monday said such a scenario could lead to massive investor flight from euro zone bonds.

"A 'soft restructuring' of Greece's debt is not the worst scenario and the fact that European authorities are finally addressing Greece's debt in the least disruptive way for the markets can actually be viewed as a positive," Serebriakov added.

The euro last traded up 0.6 percent at $1.4234, recovering from a seven-week low of around $1.4048 hit on Monday on trading platform EBS. Some traders said as long as it stayed below its 55-day moving average of $1.4280, it was vulnerable to a test of its recent lows.

The $1.40 trading level has kept the euro supported with buying from central banks and hedge funds.

The yen, meanwhile, fell broadly as Toshiba Corp (6502.T) was said to be close to buying Swiss-based Landis+Gyr and media reports said Takeda was in advanced talks to purchase Swiss-based rival Nycomed, developments seen as the catalyst for yen selling.

The euro rose 1.3 percent to 115.80 yen, while the Swiss franc was up 0.5 percent at 91.86 yen. The dollar rose to 81.34 yen, up 0.7 percent.

Some investors see the dollar outperforming the euro this year.

DiDi Weinblatt, vice president of mutual fund portfolios at USAA Investment Management Company in San Antonio, Texas, said the June conclusion of the U.S. Federal Reserve's second round of quantitative easing, called QE2, should cause Treasury yields to rise.

The Fed's bond buying program launched in November and entailed buying $600 billion in Treasury securities.

"With the end of QE2 nearing I am nervous about buying Treasuries right now," she said. "The whole world is based on supply-and-demand dynamics, and so the Fed is going to leave a large void, which should push Treasury yields higher."

Weinblatt, who oversees just under $4 billion in assets, said higher yields should make dollar-denominated assets more appealing and that should buoy the dollar.

"The euro still faces peripheral debt issues and that should weigh on the currency," she said.

The U.S. dollar index .DXY, which tracks the performance of the greenback against a basket of currencies, is down 0.4 percent since November 3 and down 9 percent since late August, when Fed Chairman Ben Bernanke signaled QE2 was on the horizon.

The euro hit a 17-month peak near $1.4940 in early May, buoyed by market expectations that the European Central Bank would raise interest rates further in the coming months, while the Federal Reserve is expected to keep interest rates near zero this year.