Doubts over Greece add to euro's ECB-driven frailty

LONDON | By Jamie McGeever

The euro slid to a two-week low and a rally in European shares stalled on Wednesday after a Greek official said the country may not make an upcoming repayment to the International Monetary Fund.The euro's fall follows remarks from a European Central Bank board member on Tuesday that the central bank could increase the pace of its bond-buying in May and June, bringing its losses against the dollar this week to as much as 3 percent.
"With Greek government liquidity particularly tight and reports suggesting the IMF payment on June 5th is under question, then we expect further turmoil ahead before any deal is ultimately reached," Royal Bank of Scotland rates strategists said in a note on Wednesday.
The euro fell as low as $1.1065 EUR= early on Wednesday, off almost three cents since ECB Executive Board member Benoit Coeure said this week that the bank may "moderately" increase its bond-buying programme in May and June.
It was last down 0.3 percent on the day at $1.1110.
The Greek government's parliamentary speaker said on Wednesday that Athens will not make a payment to the IMF that falls due on June 5 unless it has
reached a deal with its creditors by then.
Euro zone government bond yields were also lower, widening the gap between benchmark U.S. and German yields further in favour of the dollar.
The 10-year yield spread moved out to around 169 basis points US10YT=RR DE10YT=TWEB, marking an increase of almost 20 basis points in just two days.
The dollar was broadly stronger as a result, also supported by punchy U.S. housing data on Tuesday. The greenback rose to a two-month high against the yen above 121.00 yen JPY=.
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European shares were unable to draw support from the weaker currency and lower yields, and mirrored the sticky performance of Asian bourses.
MSCI's broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS, fell 0.4 percent. But Japan's Nikkei stock index .N225 ended up 0.9 percent at a fresh 15-year peak, helped by a weaker yen and data showing the economy grew at a 2.4 percent annualised rate in the January-March period.
That was the fastest pace of growth in a year, beating the consensus estimate for 1.5 percent.
After Tuesday's 1.65 percent surge, European shares paused for breath on Wednesday, unable to get a boost from the euro's weakness against the backdrop of increasing uncertainty over Greece.
The FTSEurofirst 300 index of leading shares was flat at 1606 points .FTEU3, while Germany's DAX .GDAXI, France's CAC 40 .FCHI and Britain's FTSE 100 .FTSE were all down around 0.2 percent.
European bank shares were in focus were in focus after Switzerland's UBS (UBSG.VX) paid $545 million to settle with U.S. authorities over currency rigging. Four other global banks are expected to settle later on Wednesday.
U.S. futures pointed to a flat open on Wall Street, following its mixed performance on Tuesday. The Dow Jones industrial average .DJI eked out a slight gain to close at a fresh record high, while the S&P 500 .SPX edged down, although not before touching a record intraday high.
Data showed that U.S. housing starts in April jumped to their highest level in nearly 7-1/2 years and building permits soared, raising hopes that the economy was regaining strength after stalling in the first quarter but also rekindling fears the Fed would raise interest rates sooner rather than later.
"We believe the minutes may describe a conversation regarding the criteria for a rate hike – specifically, a discussion of the developments required to make Fed officials 'reasonably confident' that inflation will accelerate to 2 percent over the next two-to-three years," Credit Suisse analysts said in a note on Wednesday.
The consensus among economists and traders points to the Fed raising rates in September.
Crude oil futures were off session highs but still took back some lost ground after sinking more than 3 percent overnight as the dollar strengthened.
Brent LCOc1 jumped 1.4 percent to $64.90 a barrel while U.S. crude CLc1 rose about 1.1 percent to $58.61, after both shed more than $2 a barrel on Tuesday.
(Editing by Hugh Lawson; To read Reuters Global Investing Blog click here; for the MacroScope Blog click on blogs.reuters.com/macroscope; for Hedge Fund Blog Hub click on blogs.reuters.com/hedgehub)