The euro slipped against the dollar on Tuesday but stayed within its recent range as investors waited to see whether Greece will agree to painful austerity measures that are crucial for a rescue package to avoid a messy debt default.
Optimism over Greece waned during the European session, dragging stocks and risk-sensitive currencies including the Australian dollar down from their highs.
For Greece, failure to secure the 130 billion euro ($170 billion) rescue would mean it faces a messy debt default and destabilize the entire euro zone.
Clearly the tail-risk at this time is that developments in Greece lead to a disorderly situation and a sharp move lower in the euro, said Lee Hardman, currency strategist at BTM-UFJ.
Citi's chief economist Willem Buiter raised the estimate of the likelihood of Greece exiting the euro to 50 percent over the next 18 months, from 25-20 percent previously.
He argued Greece's failure to meet conditionality targets and a steady drop in the willingness of the creditors to pump in more funds meant the prospects of an exit had increased.
On the other hand, if Greece does reach a deal, the euro could receive a short term boost. Any positive reaction for the euro would be fleeting as worries that Portugal may require another bailout and concerns the euro zone will slip into recession would keep investors bearish.
The euro was down 0.2 percent at $1.3100, well below a six-week high around $1.3235 hit at the end of January. It fell past stops at $1.3210 with more sell-stops cited below $1.3080. Chartists said support for the euro was seen at its January 25 low of $1.2931 and then to $1.2857 - a 61.8 percent retracement of its January rise.
The one-month 25-delta euro/dollar risk-reversal showed a widening premium for euro puts, showing increasing demand to hedge against a fall in the euro.
Bearishness towards the euro is gathering pace as investors' patience runs thin with Greek debt talks dragging on and officials are racing against time to avoid a messy default.
European Union officials say the full package must be agreed with Greece and approved by the euro zone, European Central Bank and International Monetary Fund before February 15 to allow for complex legal procedures involved in the bond swap to be completed by a March 20 bond redemption.
On Monday, France and Germany called on Greece to hand over the interest it pays on its debt into a protected account to ensure it meets commitments to creditors.
SWISS REAFFIRM PEG
The euro dropped against the Swiss franc after the Swiss National Bank's interim chief Thomas Jordan said the central bank was ready to buy unlimited quantities of foreign currency to defend its 1.20 franc cap and will take additional steps if warranted.
The euro/Swiss franc dipped to around 1.2072 francs from around 1.2082 francs beforehand. Earlier the euro had inched up on market talk before the speech that the SNB could signal its intention to raise the peg.
Against the yen, the dollar gained 0.25 percent to 76.77 yen, up from 76.14 reached after upbeat U.S. jobs data last Friday.
The dollar was well bid after Japanese Finance Minister Jun Azumi said the country followed up its record yen-selling intervention last year with covert operations and that it is ready to step in again to counter speculative moves.
Meanwhile, the Aussie dollar held on to much of the gains made after the Reserve Bank of Australia kept interest rates steady, surprising most investors who had wagered on a cut.
The Aussie hit a six-month high of $1.0823 against the dollar before dropping back to $1.0781, up 0.5 percent on the day.
If we continue to see positive equity developments it will be very hard to sell the Aussie against the dollar or the yen, but on a relative basis it is starting to look a little stretched, said Adrian Schmidt, currency strategist at Lloyds Banking Group.