The euro fell on Wednesday on worries about how a deal on Greek debt will be implemented and concerns about whether U.S. lawmakers can agree a deal to avoid the so-called fiscal cliff.
The yen, seen as a safe haven during times of economic uncertainty, outperformed. It was also helped by investors paring back aggressive expectations of monetary easing by the Bank of Japan in coming months.
The euro fell 0.4 percent to $1.2890, as institutional and Russian investors sold. Traders cited bids at $1.2870 and $1.2850, which could check losses in the near term with some attributing the euro's weakness to talk of dollar demand for month-end portfolio adjustments.
The euro also fell to a 2-1/2 month low against the Swiss franc, another safe haven, at 1.20305 francs on trading platform EBS.
The single currency has fallen from a one-month high against the dollar of $1.3010, struck after international lenders agreed a plan to cut Greek debt earlier this week, allowing the country to avoid a chaotic default.
But a lack of detail and growing skepticism over how Athens will implement the reforms needed to reach the new targets made investors wary of adding euros to their portfolios.
The deal is still subject to approval from German lawmakers, which some say could weigh on the euro, although it is widely expected to be approved on Friday.
"The discussion in Germany currently is that people are aware this is not a long-term solution so most people know we will have the same situation in a couple of months where they have to decide to provide more funds or not," said Lutz Karpowitz, currency analyst at Commerzbank.
"We might see some pressure on euro/dollar from German lawmakers because we know that usually during a vote in parliament the skeptics are out."
With the Greek deal out of the way analysts said investors were focusing on the U.S. fiscal cliff - a combination of automatic tax hikes and spending cuts due to kick in next year that could tip the world's biggest economy into recession and depress the global outlook.
The U.S. Congress pushed toward compromise on Tuesday on the fiscal cliff, but agreement still appeared elusive.
"If (the U.S. talks) go well, the relief on peripheral assets may have legs, including the euro. If it goes badly, even France may get questioned by an uncertain market, and we would expect the euro to suffer," Barclays strategists said in a note.
Comments by U.S. Senate Majority Leader Harry Reid about the lack of progress by Democratic and Republican lawmakers also fanned concerns, and added to demand for the dollar and yen.
YEN REGAINS GROUND
The yen rose as investors unwound long dollar and euro positions built in recent weeks on expectations that a fresh election on December 16 will see a new Prime Minister elected who is widely expected to put pressure on the Bank of Japan to ease its ultra-loose monetary policy.
The Japanese currency had lost about 4 percent against the dollar over the past two weeks as investors started to price in a possible shift in monetary policy after the Japanese election.
Shinzo Abe, likely to emerge as premier, has called for more aggressive easing, but some investors have begun to question how much impact he will have on monetary policy.
"We've had some profit taking on the yen too, if you look over the past few weeks the move has been very rapid to the topside," said Saeed Amen, currency strategist at Nomura.
He added that comments by Abe on lower interest rates were having a diminishing impact.
The dollar fell 0.3 percent to 81.89 yen, retreating from last week's 7-1/2 month high of 82.84 yen. Market players cited demand for the dollar at 81.70 yen and said this was likely to check the Japanese currency's gains.
The euro also fell against the yen, dropping 0.7 percent on the day to 105.64 yen, moving away from a seven-month high of 107.135 yen set on Monday.
© Thomson Reuters.
