The euro fell back below $1.30 on Tuesday but later recovered as fresh nerves over Greece's debt talks drained risk appetite.

Greece was expected to herald an agreement over the weekend with its private bondholders to write down around €100bn in debt. However markets were disappointed on Monday when euro zone finance ministers rejected an offer made by bondholders to help restructure Greece's debts.

Negotiations continue and while there is frustration over lack of progress made with the debt talks, underlying hopes that an agreement will soon be made, helped the euro pare losses against the dollar.

Meanwhile the dollar firmed against most major currenices on Tuesday ahead of the Federal Reserve's two day policy meeting. Investors will be looking out for any indication of when the central bank will raise interest rates.

The dollar index, which measures the US currency against a basket of six others, rose to 79.854 from 79.777 at the start of the week.

Against the yen, the dollar rallied to ¥77.74 from ¥77.03 on Monday as the Bank of Japan kept its interest rate unchanged and reduced its economic growth forecasts for 2012.

The pound rose to $1.5605 from $1.5564 the previous session as investors cheered data that showed the UK government's budget deficit narrowed in December from the same time a year earlier.

Sterling has recently been pressured by concern about its arduous economic recovery and rising debt levels.

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