Investing.com - The euro edged higher against the softer dollar on Wednesday, but gains were capped as the prospect of a new political crisis in Greece spooked investors and weighed on market sentiment.
EUR/USD eased up 0.10% to 1.2385, reversing the single currency’s drop to a two-year trough of 1.2246 on Monday.
The dollar remained broadly weaker following a steep selloff in the previous session, sparked by fears over risk from political instability in Greece and new restrictions on China’s debt markets, which bolstered demand for the traditional safe haven yen.
The euro was lower against the yen, with EUR/JPY down 0.27% to 147.64, holding above Tuesday’s lows of 146.78.
Investors remained wary following a surprise decision by the Greek government to bring forward a parliamentary vote for president to next week from February.
Markets were spooked by the risk of snap elections which could take place if Prime Minister Antonis Samaras’ candidate is not approved by parliament, which could see the anti-bailout Syriza party take power.
The decision prompted the stock market in Athens to plummet 9.5% on Tuesday, the largest one day decline in over 20 years.
The Greek stock market suffered fresh falls on Wednesday and the yield on Greece's 10-year bond rose to 8.55% from 8.12% late Tuesday.
The U.S. dollar index, which measures the greenback against a basket of six major currencies, was almost unchanged at 88.66, off Tuesday’s lows of 88.16. On Monday the index rose to a five year high of 89.53.
Demand for the dollar looked likely to remain supported by the diverging monetary policy stance between the Federal Reserve and central banks in Japan and Europe.
Last week’s strong U.S. jobs report for November prompted investors to bring forward expectations for the first hike in interest rates to mid-2015 from September 2015 ahead of the report.
Investors were looking ahead to next week’s policy statement from the Fed amid speculation that policymakers could drop an assurance that interest rates will stay low for a "considerable time".
Elsewhere, USD/JPY was down 0.32% to 119.28, holding above Tuesday’s lows of 117.92. The pair rose to seven year peaks of 121.83 on Monday.