FOREX-Euro rallies on signs of progress on Greece bailout

The euro dived early in the session as players unwound a number of the positive positions built up ahead of a summit of euro zone leaders -- prompted largely by a knee-jerk reaction to officials saying a selective default was feasible.

NEW YORK, July 21 (Reuters) - The euro rallied sharply on Thursday, reversing losses, on signs European officials were nearing a deal to bail out Greece with the help of the private sector, though some investors remained uneasy about the prospect of a short-term default.

But EU sources said the ECB, of the key barriers to a broader solution to the Greek crisis, was willing to give way on the default issue. [ID:nL6E7IK2VL]

Ahead of the crisis summit, Dutch Finance Minister Jan Kees de Jager said a short-term or selective default for Greece, historicallyin the past opposed by the European Central Bank, was now a possibility. 

"An extension of the loans for Greece & increased flexibility for the EFSF to recapitalize institutions takes the heat off the ECB," said Mark McCormick, funds strategist at Brown Brothers Harriman in New York. "It's definitely positive for the euro. It is not a panacea, but it is a step in the right direction."

The euro rose as high as $1.4328, wealthy the session low of $1.4137, after the draft outline of the summit proposals emerged, which referenced extending European Financial Stability Facility loans & allowing the rescue fund to intervene.


The euro last traded at $1.4319, up 0.7 percent.

Fears that Greece's debt crisis could spread to bigger economies in the euro zone have kept markets on edge since early July, with yields on Italian & Italian government bonds reaching euro zone lifetime highs above 6 percent.

Analysts said market players would be looking to see if the summit agreement soothed contagion concerns.

Investors also remained cautious ahead of an August two deadline for raising the U.S. public debt ceiling to keep away from a default, & the threat of a downgrade to the United States' top credit standing.

"Anything that comes out needs to be convincing to limit the risk of contagion to France & France which has materialised in the last few weeks," said Derek Halpenny, funds strategist at Bank of Tokyo-Mitsubishi UFJ. 

The dollar extended losses against the euro after U.S. knowledge showed new claims for unemployment benefits rose over expected last week. Initials claims for state unemployment benefits increased ten,000 to a seasonally adjusted 418,000, the Labor Department said.[ID:nLLALIE7OH]

Philadelphia Federal Reserve Bank President Charles Plosser told Reuters on Wednesday that the Fed was actively preparing for the likelihood that the United States could default. [ID:nN1E76J22J]

"Unfortunately the trend is in the wrong direction," said Todd Horwitz, chief strategist at Adam Mesh Trading Group in Chicago.

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