* Gains for euro, sterling prod dollar index lower
* Euro on course for best week this year
* But weekly rise in 1-week volatility most since launch of
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Patrick Graham
LONDON, April 20 The euro jumped around half a
percent against the dollar on Thursday as some traders shut down
broad bets against the common currency and French assets ahead
of the first round of presidential elections on Sunday.
The countdown to the French vote, which polls suggest will
usher far-right candidate Marine Le Pen into a two-person runoff
next month, has seen market measures of implied currency
volatility surge week-on-week by the largest extent
since the launch of the euro.
However, the euro itself has firmed, gaining 1.5 percent
since the start of a shortened trading week on Tuesday to reach
its highest level since the end of March. By 1030 GMT it was up
0.45 percent on the day at $1.0760.
Traders said short-term players were closing out positions
taken in anticipation of euro weakness into the vote, in part
emboldened by the steady drip of polls confirming that centrist
candidate and favourite Emmannuel Macron would lead returns on
"Squaring up may be a factor," said BMO strategist Stephen
Gallo. "Short euro is still one of the larger positions out
there. No risk on the table means take some of that off. So you
would take off your euro shorts, take off your short OAT
positions and put your money under the mattress."
"(But) there is still no fundamental reason for the euro to
be rising here."
The stakes for investors in Sunday's vote are high, with
both Le Pen and another anti-European Union, anti-euro candidate
-- the far-left Jean-Luc Melenchon - among the top four.
Another trader at a major bank in London said he had seen
substantial demand for options structures hedging investors
against volatility in the currency, but said that was driven by
the need to protect against a fall rather than a rise.
"The narrative that the outcome of the election is looking
better in recent weeks is simply WRONG," Deutsche Bank
strategist George Saravelos wrote in a brief note to clients on
Thursday morning's price action.
"All four main contenders are within 4 points, well within
the 6 point margin of error in previous elections.
"Market behaviour is starting to look worryingly similar to
the run-up to the Brexit and Trump votes where investors started
to overweight marginal shifts/info in polls, creating a
self-reinforcing belief that things are OK," he added.
Traders also said that the moves came amid a broadly weaker
tone to the dollar, which sold off across the board on Tuesday
as faith in continuing U.S. economic outperformance and the
Trump administration's promises of tax reform wavered.
The dollar index was down 0.2 percent on Thursday, also
falling sharply against sterling and the New Zealand dollar
before regaining some poise.
"We still expect the dollar to strengthen a bit more into
the end of year, but I acknowledge risks that the dollar has
peaked," said Barclays strategist Hamish Pepper.
"The data has started to look slightly more inconsistent
than it was, and there is the doubt over what we will get on the
For Reuters Live Markets blog on European and UK stock
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(Additional reporting by Danilo Masoni, editing by Gareth