Ahead of an upcoming March 20 bond-redemption deadline, Athens must convince at least 90% of its private bondholders by Friday to participate in a voluntary debt exchange. As part of a recent EUR130 billion ($172 billion) assistance package, investors are being asked to accept a 53.5% write-down on their holdings, which will help keep the Hellenic republic from spiraling into a destabilizing default.
Market participants have become increasingly pessimistic about a deal, dubbed PSI for private-sector involvement, going off smoothly. Those fears helped shave nearly 3 cents from the euro's value this week alone. After hitting a near three-month high at $1.3486, the euro traded at $1.3199 late Friday.
"People want to push euro/dollar lower, and want to position themselves for a partial failure of the PSI," said Sebastien Galy, senior currency strategist at Societe Generale in New York. With renewed pressure on euro-zone peripheral economies, "the odds are that we hit $1.30 within the next few weeks," he added.
The worry is that after months of uncertainty, Europe's unfinished business could suck the euro into a downdraft, analysts say. Auctions in Germany, Netherlands and Austria, which are scheduled to come to the market next week with an estimated EUR9 billion to EUR10 billion in government debt, could be an important test of investor sentiment. Should Athens fail to strike a deal with its bondholders, it could rattle other bond markets that have only recently begun to settle.
In addition, euro-zone officials will meet next week to render a final verdict on Greece's second bailout, with any delays likely to pressure the single currency. Friday, Greece's five-year credit-default swaps hit a record high, indicating investors may be bracing for a messy default.
Although the International Swaps and Derivatives Association decided Thursday that Greece's restructuring hadn't triggered a payout of its CDS contracts, a poorly received debt exchange would change the game.
Analysts at Barclays Capital warned a participation rate below 75% would trigger more market turbulence.
"Although this is a low probability event in our view, it will have a high impact," the bank said. "Deciding on a new plan within days, which will be forced to all Greek debt holders and will most likely include a larger haircut, may prove to be a very difficult task."
Aside from Europe, next week's U.S. payrolls report may confirm what most economists say is a growing economic divergence between the euro zone and the world's largest economy.
Strong U.S. data normally helps feed appetite for higher-yielding currencies and dampens the dollar. However, a jobs figure above the current consensus forecast of 210,000 may boost the dollar if it reduces the likelihood of the Federal Reserve unleashing a third wave of bond-buying, or quantitative easing, to boost the economy.
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