Euro holds gains vs dollar as Greek debt saga plays out

By Shinichi Saoshiro

TOKYO (Reuters) - The euro held on to gains on Tuesday after surging against the dollar as the initial shock of seeing Greece heading for a debt default eased slightly, but tensions remained high as the market awaited further developments in the deepening crisis.

The euro stood at $1.1216 after surging from a four-week low of $1.0955 struck overnight, helped in part by the sharp flight-to-quality drop in U.S. debt yields that dented the greenback.

The common currency hit the low in a knee-jerk reaction to developments over the weekend that saw Greece's creditors lose patience and freeze a credit lifeline after Athens opted for a national referendum on a bailout that would bring them much-needed cash.

Meanwhile, Greece is on its way to default on 1.6 billion euros of loans from the International Monetary Fund due on Tuesday and faces the possibility of exiting the euro zone.

"It is difficult to describe in one breath why the euro rebounded, but we can say that bargain hunters were waiting when it fell below $1.10. The 'troika' showing some willingness for further dialogue has also helped a little," said Kyosuke Suzuki, director of forex at Societe Generale in Tokyo.

"All in all many in the market had already factored in the likelihood of Greece defaulting. But there is no guarantee the stability will last. What is worrying is the volatility in the risk asset markets, which could impact currencies," he said.

Equities around the globe tumbled overnight, spooked by fears of Greece becoming the first country to exit the euro zone and the negative impact that could bring on the global financial system.

The CBOE Volatility "fear" index <.VIX>, a measure of the premium traders are willing to pay for protection against a drop in the S&P 500, jumped 34.5 percent to 18.86, its highest level in almost five months.

With a default now looking inevitable, the focus fell on how popular opinion takes shape in Greece before the country heads for the polls on Sunday to vote on the bailout.

The euro was down 0.1 percent at 137.65 yen , but away from a one-month trough of 133.80 hit overnight.

The Swiss franc was little changed at 1.0385 francs after being forced off a four-week high of 1.0315 on market intervention by the Swiss National Bank.

The dollar was steady at 122.68 yen. The safe-haven yen had advanced as far as 122.11 overnight, its highest since late May.

(Editing by Kim Coghill)