Euro rises before Greek vote, gains seen limited

NEW YORK: The euro edged higher against the US dollar on Tuesday but further gains looked limited ahead of a crucial Greek parliament vote on austerity measures needed to avert the euro zone's first default.

Greek lawmakers will vote Wednesday and Thursday on a package of spending cuts, tax increases and privatizations required by international lenders as a price for further financial aid.

While Prime Minister George Papandreou's Socialist government survived a confidence motion earlier this month with 155 votes in the 300-member parliament, massive protests are stepping up pressures on lawmakers ahead of the vote.

"There's general uncertainty ahead of the vote," said Mark McCormick, currency strategist at Brown Brothers Harriman in New York. "It looks like if it does pass, it might be a slim majority."

The euro last traded at $1.4319, up 0.2 percent on the day. Traders said the euro could stay in the $1.41-$1.43 range in the short term, having been unable to break above $1.4350 in recent sessions.

The European currency also got a boost from a slight increase in risk appetite on positive US home prices data and comments from European Central Bank President Jean-Claude Trichet that policymakers were in strong vigilance mode on inflation.

Analysts said the euro could see a relief rally if the vote passes, though it looked set to stay on the defensive as investors feared that a bailout would only delay an eventual default given the size of Greece's debt burden.

"It is going to be very, very tight and we are getting more and more bearish of the euro given there are larger issues at stake here apart from the Greek austerity vote," said Neal Mellor, currency strategist at Bank of New York Mellon.

"The question that is in the markets' mind is 'Will an EU debt rollover plan be enough to salvage Greece?' The focus will turn to data and if there are no signs of growth, the political will to do more on Greece will be very thin."

Progress had been made in involving the private sector in an eventual Greek rescue plan, while European Union officials were also working on a 'Plan B' if Athens were to reject all or part of the austerity package, sources told Reuters on Monday.

EUR/USD IMPLIED VOL

The possibility that the austerity plan may be rejected kept the price of options to sell the euro elevated, and analysts see the possibility of a fall below the psychological support level of $1.40 if this happens.

Without approval for the austerity measures, the European Union and International Monetary Fund say they will not disburse the fifth tranche of Greece's 110 billion euro bailout program. Athens needs the aid to pay its bills next month.

A Greek debt default could possibly spark a Europe-wide crisis and potential credit market freeze similar to the one that came after the Lehman Brothers collapse.

One-month implied euro/dollar volatility traded around 13 percent, hovering near 13.7 percent hit on Monday.

One-month 25-delta euro/dollar risk reversals, which measure the skew between euro puts and calls, traded around 2.65 in favor of puts, suggesting bearish sentiment

Short-dated Greek bonds came under pressure and the cost of insuring Greek debt against default rose.

"I think the measures will be passed. Most people do, but euro puts are expensive on the off chance that they don't go through," said a trader in London.

The US dollar index was down 0.2 percent at 75.238, sliding below a downward trendline drawn off peaks hit in June 2010 and January 2011 that now lies near 75.55. Against the yen, the dollar slipped 0.1 percent to 80.79.

The dollar fell to a record low of 0.8302 Swiss franc, while sterling hit a 13-month low versus a currency basket.

COPYRIGHT REUTERS, 2011