* 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 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
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
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
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)