Euro falls, Spanish woes overshadow Greek poll

LONDON: The euro fell from a one-month high against the dollar on Monday with the election win for pro-bailout parties in Greece overshadowed by Spanish bond yields surging back above the 7 percent level which traders view as unsustainable.

While the election result allayed immediate fears of Greece being forced out of the euro zone, uncertainty persisted as the winning centre-right New Democracy party tried to form a government with other parties backing the international bailout.

Many investors said the new government could not hope to deliver on further austerity measures with the economy already into a fifth year of deep recession.

Market players were also concerned about the euro zone's ability to take effective steps to protect Spain and Italy from the debt crisis.

"The euro is already off the day's highs, displaying that while we have a decent result in the Greek election, everybody knows it's going to be a long, rocky road and we are nowhere near the end of Greece's problems," said Jane Foley, senior FX strategist at Rabobank.

"Even if we carry on getting a better outcome with respect to Greece we have still got Spain and problems there."

The euro fell 0.15 percent on the day to $1.2619 on reported selling by Asian investors and after breaking below reported stop-loss orders around $1.2660-70. It had earlier hit a peak of $1.2748 in Asian trade.

Ten-year Spanish government bond yields, hit by persistent concern about the country's fiscal and banking problems, rose above the 7 percent level deemed unsustainable in the long run and at which other peripheral countries have asked for a bailout.

Despite the problems facing the euro zone, some strategists saw potential for the euro to rise given a build-up of huge short positions in the common currency, taken on concerns that a win for anti-bailout parties could lead to Greece rejecting austerity measures and leaving the euro.

Positioning data showed speculators' massive net short positions of 195,187 contracts last week, even after having trimmed them from the previous week's record high of 214,148 contracts.

"The election results should keep hopes alive that Greece will stay in the euro," said Taisuke Tanaka, chief FX strategist at Deutsche Securities.

"There are massive short positions on the euro. Market players now need to consider whether the euro has more downside or upside, ahead of euro zone policy makers' meetings in coming days."

European finance ministers meet on Friday and a European Union summit is scheduled for the end of this month.