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FOREX-Dollar gains against euro on French political risk, Fed views
February 22, 2017 / 3:49 PM / 7 months ago

FOREX-Dollar gains against euro on French political risk, Fed views

(Updates prices, adds comments; changes byline, dateline, pvs LONDON)

* Euro hit by nerves over French election

* Hawkish Fed comments underpin greenback

* FOMC minutes due to be released at 2 p.m. ET (1900 GMT)

* Two-yr German/U.S. bond spread hits 17-year high

By Sam Forgione

NEW YORK, Feb 22 (Reuters) - The euro hit a six-week low against the dollar on Wednesday on concern over France’s presidential election campaign, a growing gap between U.S. and euro zone interest rates and the increasing risk of a rate increase from the Federal Reserve in March.

Concerns that anti-EU candidate Marine Le Pen could win in May and deliver a fatal blow to the euro project have pushed the euro lower and increased bets on volatility in the currency.

Implied volatility for the next three months, which allows investors to protect themselves from swings in the euro - or bet on such volatility - rose to the highest since mid-December.

The euro fell below $1.05 for the first time in six weeks to $1.0494 in early trading. Concerns over French politics have added to demand for the euro zone’s safest debt, pushing two-year German government bond yields to new record lows and the premium investors get for holding the equivalent U.S. bonds to its highest in nearly 17 years.

“Relative to the Greek experience, it is much clearer for my money that if France was to leave it would be a much more negative event for the euro than if Greece was to leave,” said Roger Hallam, Chief Investment Officer for currencies with JP Morgan Asset Management in London.

The dollar index, which measures the greenback against a basket of six major rivals, was last up 0.3 percent at 101.670 after hitting a one-week high of 101.720.

The worries of a potential French exit from the European Union boosted the safe-haven yen. The dollar was last down about 0.5 percent against the Japanese currency at 113.14 yen after hitting a session low of 112.91 yen.

The Fed will release the minutes of its Jan. 31-Feb. 1 meeting at 2:00 p.m. ET (1900 GMT). Investors were awaiting the minutes to assess whether they reinforce or undermine recent hawkish comments from central bank policy makers, which have bolstered market bets on a rise in rates next month.

Fed funds futures on Wednesday implied traders saw just a 17.7 percent probability of a Fed rate increase in March. That low probability raised the risk of a bump higher in expectations.

“If the minutes suggest that there’s a pretty wide consensus that the Fed will consider a rate increase in March...I think that could lift the dollar,” said David Gilmore, partner at FX Analytics in Essex, Connecticut. (Reporting by Sam Forgione; Additional reporting by Patrick Graham in London; Editing by Alistair Bell)

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