Dollar plunges broadly on optimism for Greek deal

NEW YORK (Reuters) - The U.S. dollar was on track to post its biggest one-day percentage decline against a basket of major currencies in nearly two years on Tuesday on expectations that Greece would reach a deal with its creditors.

Greece's creditors are close to finishing a draft agreement to put to the leftist government in Athens, a source close to the talks said, injecting new momentum into long-running negotiations to release aid for the cash-strapped country. Athens has threatened to default on an International Monetary Fund payment this week without a deal.

"The big moves are happening on the back of Greece," said Alfonso Esparza, senior currency Strategist at Oanda in Toronto. "There’s a light at the end of the tunnel."

The dollar index, which measures the greenback against a basket of six major currencies, was set to post a 1.5 percent drop, its biggest one-day percentage decline since early July 2013. The dollar was on track to post its biggest one-day loss against the euro since mid-March.

The euro rose as high as 2.5 percent against the dollar to a more than one-week high of $1.11950. The greenback also dipped against the yen after reaching a 12-1/2-year peak of 125.070 early in the session and hit a more than one-week low against the Swiss franc at 0.93115.

While analysts said optimism about Greece handed the biggest boost to the euro, they also cited data showing 0.3 percent year-on-year acceleration in euro zone inflation in May.

The data helped fuel a spike in European bond yields. German 10-year Bund yields hit their highest level in over two weeks, at 0.7 percent, and posted their biggest one-day rise since November 2011.

The Greece optimism and euro zone inflation data led traders to realize that they were too bullish on European bonds and the dollar, and led them to cover short bets against the euro, said Sebastien Galy, senior foreign exchange analyst at Societe Generale in New York.

He said the euro would likely dip lower to $1.10, however, if the U.S. jobs data for May due Friday shows solid employment growth.

The euro was last up 2.03 percent against the dollar at $1.11470. The dollar was last down 0.56 percent against the yen at 124.100 yen and down 1.29 percent against the franc at 0.93320 franc.

The dollar index was down 1.48 percent at 95.935 <.dxy>.

(Reporting by Sam Forgione; Additional reporting by Patrick Graham in London; Editing by Tom Brown)