(adds trading recommendation, updates prices)
* Euro off two-month lows vs dollar in light trading
* Gains seen temporary as banks, sovereign debt concerns
weigh
* Bearish euro positions at records, euro/Swiss franc up
By Anirban Nag
LONDON, May 28 (Reuters) – The euro recovered from two-year
lows on Monday as Greek opinion polls showed more support for
parties that favour sticking with the country’s international
bailout deal, leading investors to cut some of the record
bearish bets against the shared currency.
The rebound was fragile, however, with investors fretting
about a lack of growth in Europe, the health of Spanish banks
and rising borrowing costs for peripheral euro zone countries.
The euro was up 0.15 percent at $1.2536 but off a
high of $1.2625 hit earlier in the session, with traders
reporting selling on the break through $1.2550.
This took it closer to Friday’s trough of $1.2495, its
lowest level since July 2010.
The euro gained as Greek opinion polls pointed to victory
for the conservative New Democracy party in the June 17
election. This would increase the chances of the next government
sticking to bailout terms agreed with the EU and the IMF and
make a Greek exit from the euro less likely.
“The market is clearly very short of euros, which makes
sense if you think Greece will be forced out of the euro. But if
it looks like Greece might not be forced out, then these
positions start to look quite risky,” said Adrian Schmidt,
currency strategist at Lloyds.
Speculators bolstered short euro positions to record highs
in the week ended May 22, leaving ample scope for a correction
as they cut positions and book profits.
Volumes were also thin, with a holiday in some parts of
Europe and U.S. markets closed for Memorial Day.
“Investors have got a bit exhausted selling the euro in the
absence of more negative news,” said John Hardy, currency
strategist at Saxo Bank. “So we are seeing some consolidation
after the euro’s sharp drop from $1.33 to around $1.25.”
But concerns about Spain lingered, with Spanish bond yields
rising while the risk premium on Spanish debt hit a euro-era
high as investors factored in the growing cost of shoring up its
banks.
A Spanish government source said the country may use
government debt to recapitalise its fourth-largest lender Bankia
, which last week asked for a 19 billion euro bailout
to stem losses related to soured property loans.
The euro has lost more than 5 percent so far in May and is
on track for its worst monthly performance since September.
Analysts said the market will be sensitive to more opinion
polls on Greece in the coming days and weeks, but that hefty
short positioning could mean it reacts more to positive news on
the euro zone than to negative news.
TEMPORARY GAINS
With the euro gaining some ground, the dollar index, which
tracks its performance against a basket of major currencies, was
down 0.2 percent at 82.218, off Friday’s high of 82.461,
its strongest since September 2010.
The dollar also lost 0.3 percent against the yen, last
fetching 79.41, with traders citing dollar-selling by
Japanese exporters who had missed a chance to sell it above
80.00 yen. The yen was also supported as minutes of the Bank of
Japan’s last meeting suggested a pause in easing.
Better appetite to take on risk lifted the Australian
and New Zealand dollars more than 1 percent
against the U.S. dollar.
Morgan Stanley recommended investors sell the euro against
the Aussie as economic conditions, especially in core
euro zone, could deteriorate and investors have not fully priced
in further ECB easing. It targets a drop to A$1.2570 from around
A$1.2722 currently.
Against the Swiss franc, the euro was at 1.2014
francs, staying above the 1.2000 franc floor after Swiss
National Bank head Thomas Jordan said Switzerland was preparing
plans for emergency measures including capital controls in case
the euro collapsed.
(Additional reporting by Jessica Mortimer; Editing by Ruth
Pitchford)
