May 8, 2012 / 6:06 AM / 5 years ago

Political uncertainty leaves euro vulnerable

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

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.

The International Monetary Fund showed some new flexibility on Monday over how quickly it would press deeply indebted countries to bring their budgets under control if economic growth weakens, in a sign that the growth rhetoric was gaining momentum.

Data from the U.S. Commodity Futures Trading Commission suggested the euro’s falls may be limited as many market players have already taken bearish bets. It showed speculators still held a relatively large net short position in the euro in the week to May 1. <IMM/FX>

“Everyone says the euro has nowhere to go but down based on economic fundamentals but they also say that market players are already betting in that direction,” said Satoshi Okagawa, senior global markets analyst at Sumitomo Mitsui Banking Corp. in Singapore.

Given worries about the strength of the U.S. economic recovery, traders said it made more sense to sell the euro against currencies other than the dollar. Sterling was particularly favored and hit a 3-1/2 year high versus the euro on Monday.

CLOUDS HANG OVER EUROPE

Greece’s Left Coalition party will get a chance to form a government opposed to the country’s EU/IMF bailout, after the mainstream conservatives failed to cobble together a coalition. However, the chances of the Left Coalition being able to form a government looked slim, raising the prospect of fresh elections.

Three Greek finance ministry officials told Reuters the country might run out of cash by the end of June if it does not have a government in place to negotiate the next installment of EU/IMF aid.

“As far as markets are concerned, we’ve seen repeatedly that fiscal irresponsibility gets punished more than a lack of growth,” said Simon Grose-Hodge, head of investment advisory for South Asia at LGT Bank in Singapore.

He expected any short-covering rally in the euro over the coming month would be limited to around $1.32, adding the euro could fall to around $1.28-$1.29 in that timeframe.

The euro was down 0.25 percent against the yen at 104.00 yen, staying above a three-month low near 103.24 yen hit on Monday on trading platform EBS, while the dollar was steady at 79.85 yen.

Additional reporting by Masayuki Kitano in Singapore; Editing by Susan Fenton

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