February 7, 2017 / 12:51 PM / in 8 months

FOREX-Euro set for biggest daily fall of 2017 vs dollar

* Single currency hit by French election fears

* Greek bond yields soar on bailout concern

* Cost of hedging euro volatility jumps

* U.S. dollar gains broadly

* Graphic: World FX rates in 2016 tmsnrt.rs/2egbfVh

By John Geddie and Patrick Graham

LONDON, Feb 7 (Reuters) - Beset by political worries, the euro was set for its biggest daily fall of 2017 on Tuesday as broad gains halted a four-week run lower in the U.S. dollar.

In morning trade in Europe, the single currency shed 0.8 percent to fall below $1.07, with investors again worried by Greece’s debt problems and signs that far-right candidate Marine Le Pen is gaining momentum before France’s presidential election.

Both represent large risks to the euro project as a whole and the cost of hedging volatility in the single currency against the dollar around the time of the final French vote on May 7 rose to its highest in over a week.

Elections in the Netherlands, Germany and possibly Italy, more wrangling over Greece’s bailout and an upcoming reduction in the European Central Bank’s monthly bond-buying volumes are all playing on investor nerves, analysts said.

The dollar, recovering from its worst start to a year in three decades, gained against a basket of other currencies, rising 0.7 percent. It was on track for its biggest daily gain in a month.

That strengthening accelerated after China reported its foreign exchange reserves unexpectedly fell below $3 trillion level in January for the first time in nearly six years.

“The euro is on the defensive, with markets nervous not only about European political risks but also the upcoming reduction in ECB bond purchases,” said Jeremy Stretch, head of currency strategy at CIBC.

“All in all it’s been a virtuous tailwind for the U.S. dollar this morning and there is also fear of capital flight (from China) which is feeding safe-haven flows.”

The Japanese yen gave up earlier gains against the dollar and at 0900 GMT was down 0.4 percent at 112.12 yen to the dollar .

But the yen’s relative outperformance compared to the euro underlined the perceived risks to the dollar from U.S. trade policy and signs the Trump White House would rather it did not gain further.

Widespread predictions late last year that the U.S. currency would gain in early 2017 have been upset by a combination of worries about Trump’s protectionist bent and the global implications of his approach to geopolitics.

“It is hard to talk of a ‘risk-on’ market given what the yen has done overnight,” said Neil Mellor, a currency strategist with Bank of New York Mellon in London, underlining the overnight gains for the greenback had been chiefly euro-driven.

“Until we have answers to some of the big (policy) questions I can’t see any free space for dollar bulls to run into. They are fearful of what the administration is prepared to do to actually keep a lid on the dollar.”

Signs that Britain’s own political shockwave last June, the vote for Brexit, may finally be hitting the economy helped drive sterling to a two-week low of $1.2347.

The Australian dollar shed 0.5 percent to $0.7621, after the Reserve Bank of Australia left interest rates unchanged.

For Reuters Live Markets blog on European and UK stock markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets (Editing by Catherine Evans)

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