(Updates prices, adds euro and Bund milestones)
* Euro drops below $1.10, dollar index at one-month high
* Lower German Bund yields pull down euro
* Commodity currencies sold off
By Anirban Nag
LONDON, July 7 (Reuters) - The euro fell 1 percent against a buoyant U.S. dollar on Tuesday, as German 10-year Bund yields fell to their lowest since early June and interest rate differentials moved against the shared currency.
The drop in Bund yields and the euro came after the European Central Bank left emergency liquidity for Greek banks at current levels but increased the haircuts on the collateral it demands. That kept alive fears Greek banks will soon run out of cash and that Greece’s problems will spread to other southern European countries.
Traders said the next 24 hours could be crucial. Euro-area leaders and finance ministers are meeting in Brussels to discuss Greece and a lack of progress could put pressure on the euro.
European Commission President Jean-Claude Juncker told the European Parliament on Tuesday Greece’s government must come forward with proposals to resolve its debt crisis. He said he still opposed calls for Greece to exit the euro.
Since Athens missed a debt payment to its creditors and Greek voters rejected tough conditions for further bailouts, the euro has retreated from its mid-June highs of $1.14, but there has been no panic selling. One reason is expectation the ECB will take action, including more quantitative easing, to stabilise the market.
Against the dollar, the euro fell to $1.0946, a five-week low, while the dollar index rose 0.7 percent to 96.903, a one-month high.
“It is a drift lower for the euro,” said Jeremy Stretch, head of currency strategy at CIBC World Markets. “The markets are reasonably relaxed at this stage because they believe the ECB will step in to take action to contain any contagion, should Greece step out of the union.”
Despite the euro’s resilience, doubts about Greece’s future in the euro zone and its crippled finances cloud the currency’s long-term prospects, analysts said.
Meanwhile, commodity currencies fell sharply, with the Australian dollar hitting a six-year low as Chinese stock markets went into a tailspin while oil producer Norway’s crown struck a six-month low after a sell-off in crude oil.
The Australian dollar, which is a proxy for Chinese investments, fell 1 percent to $0.7417, with a drop in iron ore prices also weighing, traders said. The New Zealand dollar also hit a five-year low of $0.6620.
The Norwegian crown fell 0.7 percent against the euro to 9.01 crowns, its weakest since mid-January. The Canadian dollar, which also has a strong correlation to oil, hit a three-month low of C$1.2732 against its U.S. counterpart .
“The drop in crude oil over the past week has materially weighed on the Canadian dollar,” ING analysts said in a note.
“The domestic outlook has also failed to lend support; the soft GDP print and disappointing second-quarter business outlook figures have increased the pressure on the Bank of Canada.” (Editing by Catherine Evans/Ruth Pitchford)