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Political uncertainty leaves euro vulnerable

LONDON - The euro fell on Tuesday and was vulnerable to more losses as political uncertainty in Greece and a change of French president threatened to derail the austerity plans at the heart of efforts to tackle the euro zone debt crisis.

Greece’s two main pro-bailout parties failed to win a majority in weekend elections and attempts to form a coalition government were not expected to succeed, 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 centred more on growth, which may create tensions with Germany’s insistence on fiscal austerity.

The euro was down 0.3 percent at $1.3027, off the previous day’s three-month low of $1.2955 and hovering just above the $1.30 level.

“The euro is at a vulnerable position at these sort of levels. Clearly, although we’ve had the elections in France and Greece, there is still a huge amount to be resolved,” said Jane Foley, senior currency strategist at Rabobank in London.

“There is certainly the prospect that the euro could be pushed well below the 1.30 level.”

Worries centred on Greece where the Left Coalition party will get a chance to form a government opposed to the country’s EU/IMF bailout. Their expected failure raised the chances that Greece could find itself without a government and out of cash by the end of June.

Traders said near-term losses could be limited as investors take profit on hefty short positions in the currency and corporate buying provided support.

Technical support came in the $1.2974/55 area defined by the previous session’s low and the Feb. 16 low. If able to break below that, the currency could target the 2012 low around $1.2623.

“I think people are biding their time now. I don’t think you’ll see many people buying euro but they’re not aggressively selling it just yet,” said a London-based head of FX sales.

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 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.

FOCUS ON CROSSES

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.

“The questioning of the U.S. momentum itself is probably just weighing on the dollar a little bit, so from that perspective it’s tough to also buy the dollar and it’s probably better to look at some of the crosses as an alternative way of playing it,” said Jeremy Stretch, head of currency strategy at CIBC World Markets.

Sterling was particularly favoured and hit a 3-1/2 year high versus the euro on Monday, while the euro fell 0.4 percent against the Japanese yen to 103.82 yen.

Stretch said euro/yen was likely to fall towards 102.50 yen over the coming days, breaking below the three-month low near 103.24 yen hit on Monday. The dollar was down 0.2 percent at 79.76 yen.