Euro shines on Greece vote optimism

NEW YORK: The euro rose for a fourth straight session as investors grew optimistic Greek Prime Minister George Papandreou would survive a confidence vote on Tuesday that could help avert a default on the country's debt.

But the euro's upside remained limited, traders said, given the hurdles Greece needs to overcome including approval by its parliament of crucial austerity measures scheduled for a vote on June 28.

Papandreou must win the confidence vote if he is to secure backing for a new round of spending cuts, tax hikes and state asset sales needed for a 12 billion euro lifeline from the European Union and International Monetary Fund to avert a sovereign default.

"The strength in the euro is a sign the Greek vote this afternoon would be positive for Greece," said Mark McCormick, currency strategist at Brown Brothers Harriman in New York.

"The moves in the market today are overall supportive of risk appetite and sentiment," he added, but warned that sentiment in the euro was still fragile "as there is still a lot of uncertainty about the outlook for Greece."

In early New York trading, the euro was up 0.5 percent at $1.43730, with offers reported around $1.43800-850. It was expected to face stiff resistance ahead of $1.45, with the 55-day moving average around $1.44110 ahead of the June 15 high at $1.44510.

McCormick said given the prospect of weak US data, the euro could potentially test highs in the $1.45-$1.47 region.

The euro earlier trimmed gains after a survey showed German investors in June took their most bearish view about the euro zone's largest economy in over two years, hurt by the Greek debt crisis and indicators of softer activity ahead.

"We should see cautious trading ahead of the Greek vote and if it is passed euro/dollar should react positively," said Roberto Mialich, currency strategist at Unicredit in Milan, who expected gains to be capped below $1.4450.

"The picture is so uncertain about the euro zone periphery that it will prevent big investors from taking large directional positions." He said if the Greek vote was not passed, investors would quickly ditch the euro, leaving it poised to test $1.40.

BETS ON EURO FALL

Although euro/dollar was higher, risk reversals showed strong demand for options betting on euro falls, suggesting longer-term investors were wary of downside risks.

In the options market, one-month euro/dollar risk reversals were trading around 2.6 percent on Tuesday in favour of bets on the euro falling, or puts. This was near the highest level since the euro zone's debt problems reached crisis point in May-June 2010.

Implied volatility on one-month euro/dollar options stood around 12.62 percent, off a high of nearly 14 percent hit last week but well above the 10.6 percent struck early this month.

The euro pared gains after Fitch Ratings said it would regard both a Greek sovereign debt swap and a rollover of maturities, even a voluntary one, as a default. This was a view echoed by the other ratings agencies.

But the impact was mitigated as Fitch also said it would review its US rating if Congress did not agree to raise the country's debt ceiling by Aug. 2.

This helped push the dollar down 0.4 percent against a basket of currencies to 74.7017. The US central bank has a two-day policy meeting ending on Wednesday, its first since US economic data started to take on a decisively weaker tone around a month ago.

COPYRIGHT REUTERS, 2011