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FOREX-French political noise pushes euro below $1.05
February 22, 2017 / 12:54 PM / 10 months ago

FOREX-French political noise pushes euro below $1.05

* 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 (Reuters) - 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. equivalents.

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 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.

“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 Ferris)

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