The euro dropped to a new four-month low against the dollar on Tuesday after Greece failed to form a government and said it would hold new elections, raising risks it could eventually exit the euro.
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The euro fell for the fifth of the last six sessions on chances left-wing politicians opposed to Greece's international bailout could win the June elections. The prospect raised risk aversion and German government bonds rose sharply. Italian and Spanish 10-year yields hit 6 percent on the news.
The dollar, bolstered by safe-haven flows, also gained against the yen as investors compared U.S. data releases to those from elsewhere in the world and saw the world's largest economy recovering, albeit at a slow pace.
While the failure to form a coalition government in Greece was hardly a surprise, Valentin Marinov, currency strategist, at CitiFX in London said it does raise concerns "that the anti-bailout parties will gain further ground and potentially form a majority."
That is an outcome that substantially raises the possibility of a near-term Greek departure from the euro zone, he added.
The euro last traded down 0.5 percent at $1.2761, with the session trough at $1.2752, the lowest since Jan. 18.
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Adding to the euro's woes was a report on Tuesday showing the Greek economy slid deep in recession. Investors were cautious on Greek President Karolos Papoulias's proposal to put together an administration of technocrats with most believing it was unlikely to be accepted, making a new election the most likely outcome.
Greece also confirmed on Tuesday it would pay a bond maturing on May 15 and its accrued interest on time after weighing pros and cons and current conditions. However, that provided little comfort for investors.
While there was some good news from Germany, the euro zone's largest economy, where a report showed the economy grew 0.5 percent in the first quarter of 2012, it was largely offset by a survey of German analyst and investor sentiment which deteriorated sharply in May. GDP in France, on the other hand, flatlined and Italy's economy contracted by 0.8 percent.
The U.S. data did nothing to prevent flows into the dollar and at the margin helped, according to analysts.
"It's not great (U.S.) data, but if you compare it to the overall flavor of the euro zone and China, the U.S. economy is outperforming in its recovery," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange, Inc in Washington.
U.S. retail sales edged up 0.1 percent, the smallest gain since December, held back by a decline in receipts from building materials and clothing stores, the Commerce Department said on Tuesday. Simultaneously, U.S. consumer prices were flat in April as households paid less for gasoline and natural gas, the Labor Department said.