Euro weakens on fears of political instability in Greece

BY ANIRBAN NAG

LONDON Wed Dec 10, 2014 4:09am EST

(Reuters) - The euro fell broadly on Wednesday amid growing concerns over the political situation in Greece that could increase the chances of monetary policy easing early next year by the European Central Bank.

The euro was down 0.5 percent against the yen at 147.40 EURJPY= and gave up early gains against the dollar to trade slightly lower on the day at $1.2370 EUR=. The common currency had risen to a high of $1.2448 on Tuesday as investors trimmed long dollar positions, booking profits ahead of the year-end.

The Greek government has brought forward to next week a presidential vote that will force nearly two dozen independent lawmakers to decide whether to side with Prime Minister Antonis Samaras' pro-bailout cabinet or with leftist radicals who have vowed to tear up the bailout.

The decision prompted the steepest daily fall in Greek stocks on Tuesday in more than a quarter century and a jump in bond yields.

Some investors and speculators have taken the opportunity to place fresh bets against the euro, which has shed nearly 10 percent against the dollar this year.

"The Greek situation is coming back to haunt the euro," said Niels Christensen, FX strategist at Nordea.

Christensen added the position adjustment in the dollar seemed to have run its course and the greenback was better bid.

"Also, for the euro, if there are not too many banks lining up for cheap long-term loans that are on offer from the ECB tomorrow, pressure on the central bank will grow to ease further. And that is not good for the euro," he added.

On Thursday, the ECB conducts its second targeted long-term refinancing operation. Over time, expectations have been decreasing to as low as 130 billion euros in the latest Reuters poll, substantially missing volumes desired by the ECB.

The ECB had intended to expand its balance sheet sharply by offering these cheap loans to banks and flooding the system with euros, driving down the value of the common currency.

The greenback pared losses against the yen to trade at 119.40 JPY=, down 0.3 percent on the day. At one point on Tuesday, it dropped more than 2 percent to 117.90 in a vicious turnaround from a seven-year peak of 121.86 set on Monday.

"The drop by dollar/yen was shocking. It was a reminder of how scary the market can become when positions are tilted suddenly in one direction," said Bart Wakabayashi, head of forex at State Street in Tokyo.

(Additional reporting by Shinichi Saoshiro; Editing by Gareth Jones)