Markets: News  

Dollar falls, euro touches $1.26

NEW YORK (MarketWatch) -- The dollar fell on Wednesday, pushing the euro briefly above $1.26 -- a level it hasn't closed above since late May.

The U.S. currency was weighed earlier by a pair of reports which signaled potentially more weakness in the U.S. economy, while more sanguine sentiment ahead of the Greek elections this weekend helped underpin the euro.

The euro (EURUSD) lately traded at $1.2579, down from $1.2510 in late North American trading Tuesday, when Spanish and Italian bond yields surged. Read about Spanish yields, euro.

The shared currency rose high as $1.2610, but hasn't closed above $1.26 since May 22, according to FactSet Research

The dollar index (DXY) , which measures the greenback's performance against a basket of six major currencies, slipped to 82.126 from 82.386.

Analysts at DailyFX also noted reported comments from Cyprus about prospects for international aid, and more details about Spain's bank bailout that have been more favorable could be supporting the euro. Read more on Cyprus.

The dollar declined following a report showing U.S. producer prices fell 1% last month, more than some economists forecast and signaling some decrease in the risk of inflation. Read about PPI.

Separate data had retail sales slipping 0.2% in May, in line with expectations. See story on retail sales.

Lately, traders have backed away from the dollar in part due to growing expectations that weakness in the U.S., on top of European uncertainty, could prompt the Federal Reserve to either extend its current bond-purchase operation or buy more debt outright. The latter is seen as akin to printing money, devaluing a country's currency.

And that's a big step some analysts still say isn't around the corner.

"Policy easing by the Fed still largely depends on a significant worsening in economic data and financial market conditions - neither of which appears likely in the very near term," strategists at Barclays Capital said.

In an interview aired Tuesday, Federal Reserve Bank of Chicago President Charles Evans said the central bank would back moves to spur rapid job growth, boosting U.S. equities. Read more on stocks, Evans.

Although Evans doesn't vote on the policy-setting Federal Open Market Committee this year, the comments fueled speculation that the Fed might lean toward more asset purchases.

The next major event for markets is the Greek election, where it remains to be seen if the Greek populace will vote for parties that will support the existing international bailout and austerity measures, or opponents, which could raise the risk of the country leaving the euro zone.

"The recovery in the euro is being driven by expectations that one, Greece will vote for a pro-bailout party at this Sunday's election and two, that the European authorities will step in with euro bonds/more ECB support if Italy gets in more trouble and sees its bond yields surge to unsustainable levels," said Kathleen Brooks, research director at Forex.com. "This has helped to keep volatility levels depressed."

However, if Greece votes for an anti-bailout party, "we could easily see a bout of risk aversion and a spike higher in volatility," that could push the euro back towards $1.20, its lows from 2010, she wrote in emailed comments.

Among other major currency pairs, the U.S. dollar (USDJPY) turned down to buy 79.35 Japanese yen, compared with ¥79.44 Tuesday.

The British pound (GBPUSD) turned lower, buying $1.5522 from $1.5583.