LONDON – The euro fell to a two-month low on Thursday despite approval of a crucial austerity package by Greece, with investors focused on a European Central Bank policy meeting later in the day.
The ECB is widely expected to leave interest rates on hold, but comments by President Mario Draghi on the weak economic outlook and gloomy European Commission forecasts have raised speculation it might just cut its main rate from 0.75 percent.
"If you wander around the trading floors they are flirting with the idea we could get a cut from the ECB today," said Daragh Maher, director of FX strategy at HSBC.
The common currency was down 0.1 percent at $1.2765, not far from Wednesday's two-month low of $1.2736.
The euro was under pressure even though the Greek parliament approved in the early hours of Thursday an austerity package needed to unlock international aid and avert bankruptcy, defying political rifts and violent protests.
CLIFF EDGE LOOMS
The dollar was up 0.1 percent, near a two-month high against a basket of major currencies of 80.924 hit on Wednesday, as concerns about U.S. fiscal problems raise its safe-haven appeal.
Investors fear the preservation of the status quo in Washington after this week's elections means may make it hard to reach a deal on about $600 billion in spending cuts and tax increases due to start early next year, and that this could derail the U.S. economic recovery.
The "fiscal cliff", which can be avoided only if Democrats and Republicans settle their differences in Congress, provoked a selloff on Wall Street on Wednesday. Asian markets followed suit, pushing the MSCI world equity index <.MIWD00000PUS> down 0.2 percent at 326.13 points.
"The fiscal cliff is here and it will reveal itself to be very real," said Jeffrey Sica, president of Sica Wealth Management.
Sica said higher capital gains taxes could form part of a Congressional deal to tackle the budget deficit, and this may be encouraging investors to sell equities. "The strong likelihood that capital gains (could) double will force investors to take profits now to avoid paying higher capital gains taxes later," he said.
In Europe the FTSEurofirst 300 index <.FTEU3>, which lost 1.4 percent in Wednesday's selloff, recovered slightly on Thursday to be up 0.15 percent at 1,100.85 points. London's FTSE 100 , Paris's CAC-40 and Frankfurt's DAX all traded around 0.25 percent higher.
U.S. stock futures were also higher, up 0.2 percent, pointing to a recovery when Wall Street opens.
In the fixed income market the approaching ECB meeting kept most prices little changed. Much attention focused on a Spanish sale of 4.8 billion euros ($6 billion) of new debt, which included a 20-year bond - the longest dated issue to be auctioned since mid-2011.
The sale drew good demand as Spain's debt has been trading in relatively narrow ranges since the ECB promised to step in buy unlimited amounts of the bonds, provided Madrid requests help and agrees to a closely-monitored economic reform programme.
Spanish 10-year bond yields gained 5 basis points after the auction at 5.77 percent, but German 10-year bonds, often an indicator of any change of sentiment in the euro zone, were largely unchanged at 1.38 percent.
Commodities markets focused on developments in China where the government has begun a once-in-a-decade leadership change against a backdrop of growing social unrest and public anger at corruption and a gap between rich and poor.
Traders are looking for hints from the Communist Party Congress on future policy direction that may affect demand from the world's biggest consumer of many industrial commodities.
"So far, contents of speeches from the 18th Party Congress have been within expectations. There hasn't been anything particularly encouraging to investors," said Orient Futures derivatives director Andy Du.
Oil rose after tumbling more than $4 on Wednesday amid concerns about weak demand for fuel as the U.S. and European economies face the risk of a prolonged slowdown.
Brent Crude traded 56 cents higher at $107.35 per barrel after posting its steepest fall since 2011 on Wednesday. U.S. crude rose 56 cents to $84.99 a barrel.
(Editing by David Stamp)