May 7, 2012 / 2:47 AM / 5 years ago

Euro drops on anti-austerity votes but off lows

An employee of foreign exchange trading company is pictured past trading monitors in Tokyo May 7, 2012. The euro tanked on Monday, breaking below its well-worn range from the past three months against the dollar after elections in Greece and France raised fresh concerns that the euro zone's hard-earned bailout and austerity steps could fall apart.Yuriko Nakao

NEW YORK (Reuters) - The euro dropped broadly on Monday after elections in Greece and France cast doubt on politicians' commitment to austerity plans aimed at tackling the euro zone debt crisis.

Renewed fears about the stability of the euro zone made the common currency pierce the key psychological level of $1.30 on its way to hitting a three-month low against the dollar in the overnight session.

Technical support helped pare losses during New York trade, though the single currency looked likely to remain under pressure in days ahead.

The biggest blow to the common currency was the Greek election, in which the two main parties that support the nation's international bailout failed to secure a parliamentary majority. This threw into question the future of the program and potentially the country's membership in the euro.

The euro hit a global session low of $1.2955, breaking the $1.30 to $1.35 range it has been trapped in since late January, before recouping losses to last trade down 0.3 percent at $1.3048.

"Technically, the daily momentum remains bearish after the euro collapsed in the overnight (session)," said Dean Popplewell, chief currency strategist at OANDA in Toronto. "So far this morning, cooler heads have retraced some of that loss."

"Currently, the risk reward is not to hold long euro positions in such a negative tone environment," said Popplewell, noting markets were illiquid with the UK on holiday.

In France, Socialist Francois Hollande, who has pledged to balance the budget but more slowly than his opponent, ousted centre-right incumbent Nicolas Sarkozy. The result could trigger a push-back against German-led austerity across the euro zone.

There is strong support for the euro around $1.2955, the 61.8 percent retracement of the euro's rally from its January low to a high in February.

"There is a lot of technical support at that level, so the market has calmed down a bit," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.

"Clearly damage has been done by this weekend's political developments and euro support should dissipate in the days ahead," Esiner said. "The euro will likely drop below $1.30 again and find a new range, perhaps between $1.26 to $1.28."

Uncertainty about the euro has grown over the past week as evident in the options market, with three-month euro/dollar risk reversals biased toward euro puts, trading at -2.6 vols, unchanged from the previous session but up from -2.250 vols a week earlier and around -2.0 vols in early April.

Greece might run out of cash by end-June if it does not have a government in place to negotiate a next aid tranche with the EU and the IMF and projected state revenues fall short, three finance ministry officials told Reuters.

"We remain bearish the EUR and optimistic about holding risk in the medium term," Barclays Capital said. "Still we acknowledge recent data have gone against our constructive call on risk."

"For this week, we expect risk sentiment to keep trading sideways with a negative bias until the end of the week, when we expect data releases from China to bring some relief in the form of news about a soft landing in economic growth."

Against the yen, the U.S. dollar was up 0.1 percent at 79.86 yen, having fallen back below 80 yen, seen as a support, on Friday after a disappointing U.S. jobs report.

Additional reporting by Nia Williams; Editing by Andrea Ricci

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