The euro came off its recent highs and European shares started lower on Wednesday with investors nervous about Greek bond talks and government debt sales, a day after economic data had raised hopes the global economy wouldn't slowdown as much as feared.
International creditors are set to meet the Greek government to resume the talks that broke down last week over the interest rate Greece will offer on new bonds and a plan to enforce investor losses.
A deal with the private sector is vital to cash-strapped Athens if it is to avoid going bankrupt when 14.5 billion euros of bond redemptions fall due in late March.
"Greek bond negotiations could trigger more euro weakness as they have to close a deal soon, before Greek debt repayments are due in March, Richard Falkenhall, currency strategist at SEB in Stockholm said.
If they don't come up with a solution soon, it could result in more euro weakness," he added.
The euro was holding onto gains of about 0.1% at $1.2772 in early European trade, after topping $1.2800 on Tuesday, and holding above its lowest since late August 2010 of $1.2624 hit last week.
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After yesterday's rally, investors now shift their focus to talks on Greece, with a lot being unresolved," said Frances Cheung, senior strategist for Asia ex-Japan at Credit Agricole CIB in Hong Kong.
Greek Prime Minister Lucas Papademos told the New York Times that creditors may be forced to take losses if no agreement can be reached.
European shares fell back after hitting 5-1/2-month highs on Tuesday as uncertainty around the Greek debt talks weighed on broader equity market sentiment and investors sold mining shares which had gained sharply on good economic data.
The FTSEurofirst 300 index of top European shares was down 0.5% at 1,029.25 points after hitting its highest level since early August on Tuesday.
Debt sales key
Euro zone debt auctions also hold the key to investor sentiment with several major government lining up to refinance their debts this week.
Most attention will be on Portugal's sale of Treasury bills which is its biggest debt auction since last year's bailout while Germany also holds a debt auction.
Spain and France, both of which saw solid demand for their bill auctions early this week, will face a tougher challenge when they tap the market with longer-dated debts by Friday.
"Investors remain wary of euro zone debt auctions, with the debt situation still so unclear," said Kimihiko Tomita, head of foreign exchange for State Street Global Markets in Tokyo.
The economic data flow is lighter with the German government set to unveil its forecast for economic growth which is expected to show a rise of only 0.7% for 2012 and 1.6% for 2013. It had previously forecast 2012 growth of 1.0%.
In commodity markets Brent crude rose above $112 on Wednesday and base metals held steady, supported by the positive economic data out of China where growth slowed less than feared.