4 Min Read
* Euro hit by nerves over French election
* Hawkish Fed comments underpin greenback
* FOMC minutes due to be released later in day
* Graphic: World FX rates in 2016 tmsnrt.rs/2egbfVh
By Patrick Graham
LONDON, Feb 22 (Reuters) - The euro fell briefly below $1.05 for the first time in six weeks on Wednesday, hit by a combination of concern over France's presidential election campaign and growing expectations for a rise in U.S. interest rates.
So far, concern that anti-EU candidate Marine Le Pen could win in May and deliver a fatal blow to the euro project have played out chiefly on the options market, where investors pay less to bet on the currency falling.
Three-month risk reversals - the weight of bets against the euro over bets on its strengthening - hit their most negative in more than a year, surpassing levels seen after Britain's vote to leave the European Union last year.
Implied volatility for the next three months, which allows investors to protect themselves from swings in the currency - or bet on such volatility - rose to the highest since mid-December.
Those moves are also beginning to seep into spot prices of the euro, which are down around 2 percent in the last three weeks and fell as low as $1.0497 in morning trade in Europe.
"This is politics as well as markets increasingly betting on an imminent rate hike by the Fed," said Commerzbank strategist Thu Lan Nguyen.
"Volatility is rising as investors start to prepare for the elections. I think investors are going to play this (the elections) on the options market. If you go short euro and you are wrong, it is too directional."
The dollar was stronger for the second day running, gaining around a third of a percent against the basket of currencies used to measure its broader strength.
But it dipped around a third of a percent against the yen, which tends to benefit when investors grow more worried about global political risks.
Against sterling, the dollar gained 0.1 percent to $1.2466.
U.S. Federal Reserve meeting minutes due later on Wednesday could either reinforce or undermine recent hawkish comments from central bank policy makers that have raised bets on a rise in rates as early as next month.
Cleveland Fed President Loretta Mester said late on Monday in a speech in Singapore that she would be comfortable raising rates at this point if the economy maintained its current performance.
Philadelphia Fed President Patrick Harker also told reporters on Monday that he would support a rate increase at a mid-March policy meeting as long as inflation, output and other data continued to show the U.S. economy is growing.
"The dollar was pushed up by the Fed talk, but its upside (was) heavy in the Asian session, due to factors including Japanese companies' seasonal repatriation," said Mitsuo Imaizumi, chief currency strategist at Daiwa Securities in Tokyo.
"We're all waiting for the minutes, to see if members talked about reducing the Fed's balance sheet," he said.
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
Writing by Patrick Graham, editing by Larry King