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FOREX-Short squeeze helps euro before Greek vote

Published 06/27/2011, 08:51 AM
Updated 06/27/2011, 08:56 AM

* Euro turns higher as investors cover short positions

* Greece worries cap gains; Greek govt austerity vote ahead

* Euro hovers near lifetime low vs safe-haven Swiss franc

By Naomi Tajitsu

LONDON, June 27 (Reuters) - The euro recovered from early losses on Monday as investors covered short positions after broad selling last week, but gains were capped on concerns about Greece's ability to repay its debt even if austerity measures are passed.

Sovereign demand lifted the euro above $1.42, but the single currency teetered near a record trough versus the Swiss franc as Greece's parliament opened a debate on harsh fiscal measures before a vote expected on Thursday.

Analysts said the euro would be vulnerable to any comments from Greek or other European officials which may cast doubt on the ballot's outcome, though most believe the austerity measures will be approved and give the euro a short-term boost.

"People are looking at the way the Greek government confidence vote went through last week, which suggests that the austerity vote will go through too," said Gavin Friend, currency strategist at nabCapital.

"The euro could squeeze higher, though it will be capped initially below $1.4340".

He pointed to concerns about whether the Greek austerity measures will get cross-party support and whether a long-term solution to Greece's debt problems can be found as reasons for euro gains being limited.

The euro was up 0.1 percent at $1.4207, well above an earlier session low of $1.4102. It hit a high for the day at $1.4237 as demand from sovereign entities pushed the currency through reported stop loss orders above $1.4180.

Traders scrambled to cover short positions after the euro took a beating last week due to jitters that domestic turmoil in Greece may threaten the country's chances of obtaining more bailout funds.

Technical analysts said the single currency needed to close above its 100-day moving average around $1.4195, a key resistance level, to ensure a sustained rise higher.

A fall below $1.4073 would take it to a one-month low and leave it targeting the 200-week moving average around $1.4019.

The short squeeze in the euro lifted it slightly against the Swiss franc. It traded at 1.1843 francs but hovered very near a lifetime low of 1.1808 francs, after a dramatic rally in the safe-haven Swiss unit since April.

"If they (Greece) pass the measures it will all be very well but the problem will be in implementing the policy, and if you just push the problem back two or three months, we'll find ourselves in the exact same position in time," said Chris Walker, currency strategist at UBS.

He said the bank's flows showed real money investors and speculators were significant sellers of euros in the past week. He said the euro could fall to $1.35 in the second half of 2011 due to euro zone debt issues and a gloomier global outlook.

DOLLAR SUPPORTED

The possibility of a Greek default has raised concerns about the health of the European financial system and whether it can withstand such a credit event. Such worries triggered a sell-off in Italian banking shares late last week.

Overall, the dollar has benefited from broad risk aversion stemming from the euro zone debt crisis, as investors have been cutting back on short positions in the U.S. currency.

Versus a currency basket the dollar slipped slightly to 75.570. But it hovered near 76.00, and a decisive break above there would take it to its highest in a month. Versus the yen , the dollar rose 0.4 percent to 80.74 yen.

But analysts warned investors were concerned the struggling U.S. economy is far from stable, while Washington suffers from its own fiscal problem as it approaches its debt ceiling again, which could haunt the dollar in the longer term.

"The fortunes of the USD will be determined largely by the mood in the euro zone, as the USD is now fulfilling the role of "not being the EUR", capitalising on any bad news and retreating when the market gets more hopeful," Credit Agricole analysts said in a note.

"This has lent it more of a safe-haven status recently in relation to peripheral stories, but its reaction to softer US data remains ambiguous." (Additional reporting by Jessica Mortimer; Editing by Anna Willard)

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