Euro seen vulnerable as Greek elections loom

LONDON: The euro steadied against the dollar on Tuesday as selling pressure driven by concerns over Spain's bank bailout eased, but the common currency still looked vulnerable as wary investors awaited the outcome of Sunday's Greek election.

Traders reported demand from Middle East investors that lifted the euro to a session high of $1.2523. But good offers were cited between $1.2525-40 and expected to limit gains as investors looked for opportunities to sell into euro rallies.

Sentiment was cautious after initial euphoria from Spain's 100 billion euro bank rescue waned quickly, with investors concerned bailout-related payments could rank ahead of regular government debt in the queue for repayment.

Many analysts said market players would be reluctant to enter fresh positions ahead of the Greek vote and the euro could stay within a $1.24 to $1.26 range. A win for parties opposing the austerity terms of Greece's bailout could lead to the country leaving the euro.

"Every time we get a piece of good news the market sells into it and looks for some bad news again," said Daragh Maher, currency strategist at HSBC.

"But ahead of the Greek elections people will be reluctant to go too short of the euro in case we get some good news, so it will stay quite rangy until then."

The euro was flat at $1.2475, having retreated from a high of $1.2668 hit on Monday after Spain's weekend bailout. Technical strategists said there was support at Friday's low around $1.2435 and below that at the near two-year low of $1.2288 hit earlier in the month.

The result of Greece's election looked too close to call between parties supporting and opposing the country's international bailout and harsh austerity measures accompanying it.

As a worst-case scenario should Athens decide to leave the euro, European officials have discussed limiting the size of withdrawals from ATM machines, imposing border checks and introducing euro zone capital controls.

The options market reflected the skittishness among traders with 1-week euro/dollar implied volatility spiking to a six-month high at 14.9 percent as quoted by ICAP, up from 10.8 percent last Friday.