* Euro hit by nerves over French election
* Hawkish Fed comments underpin greenback
* FOMC minutes due to be released later on Wednesday
* Two-yr German/U.S. bond spread hits 17-year high
* Graphic: World FX rates in 2016 tmsnrt.rs/2egbfVh
By Patrick Graham
LONDON, Feb 22 The euro fell 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 the
growing gap between core euro zone interest rates and the U.S.
With the minutes of this month's U.S. Federal Reserve
meeting due later, the dominant tone was consolidation for the
dollar and investors seeking the perceived security of Japan and
Germany. The yen rose half a percent against the greenback
and 0.8 percent against the euro.
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 currency 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 it strengthening - hit their most negative
since the height of the euro zone's last debt crisis in 2012,
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 euro spot
prices, which are down about 2 percent in the last three weeks
and fell as low as $1.0494 in morning trade in Europe.
"This (Le Pen winning) is still not a central scenario,"
said Roger Hallam, Chief Investment Officer for currencies with
JP Morgan Asset Management in London.
"(But) 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.
"If that probability continues to rise we would anticipate
that would continue to weigh increasingly heavily on the euro."
Worries over France 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.
The dollar was stronger against a basket of currencies for
the second day running, gaining about a third of a percent.
But its retreat against the yen pointed to the scale of
concern among investors about global political risks.
The Fed minutes due later may either reinforce or undermine
recent hawkish comments from central bank policy makers which
have bolstered market bets on a rise in rates as early as next
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
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.
"We think tonight’s minutes will again suggest caution given
still significant policy uncertainty," Commonwealth Bank
strategist Adam Myers wrote in a note to clients.
"As such, the minutes should prompt a scaling back of March
Fed tightening expectations temporarily undermining USD."
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 and Ken