Political uncertainty leaves euro vulnerable

Tue May 8, 2012 4:36am EDT
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By Jessica Mortimer

LONDON (Reuters) - The euro fell on Tuesday and was vulnerable to more losses on worries that political uncertainty in Greece and a change of French president could threaten austerity plans seen as key to tackling the euro zone debt crisis.

Greece's two main pro-bailout parties failed to win a majority in weekend elections, leaving questions over the country's ability to avert bankruptcy and stay in the euro.

Meanwhile, Socialist French president-elect Francois Hollande has advocated an approach to tackling the debt crisis centered more on growth, which may create tensions with Germany's insistence on fiscal austerity.

However, the euro stayed above the previous day's three-month low, hovering just above the $1.30 level, and traders said its losses could be limited as investors take profit on hefty short positions in the currency.

Analysts said that some in the market were coming round to the view that a mixture of growth and austerity may be necessary to get the euro zone economy back on its feet, given the deep economic problems facing some euro zone countries that have been implementing austerity measures.

The euro was down 0.2 percent at $1.3027, above a low of $1.2955 hit on Monday, its weakest level since late January.

"The market will be in a wait and see mode and consolidating around $1.30 until we get new indications as to what direction Europe goes from here," said Audrey Childe-Freeman, global head of currency strategy at JP Morgan Private Bank.

She said there was a risk of the euro breaking sustainably below $1.30. However, she said investors were not yet at the point of anticipating that Greece could precipitate a euro zone break-up.   Continued...

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. REUTERS/Yuriko Nakao