Euro climbs on Greece optimism; Fed meeting ahead

The euro rose for the second straight day against the U.S. dollar on Friday and could extend gains next week on hopes that Greece will get a new aid package needed to avoid a default that could roil global markets.

The leaders of Germany and France said on Friday they were united on a rescue deal for Greece that would include voluntary private sector participation. The euro has been hampered in recent weeks by discord between euro zone paymaster Germany and the European Central Bank, backed by France.

Caution is warranted, analysts said, with euro zone finance ministers slated to meet on Sunday and Monday, which will be followed by a summit of EU leaders later next week. The Greek cabinet, reshuffled on Friday, will face a vote of confidence by Tuesday night.

"There is a key risk in Europe linked to the Greek vote of confidence and when it passes we may well see euro/dollar attempt a move to the $1.4569 level," said Sebastien Galy, senior currency strategist at Societe Generale in London.

"We have maintained a bullish forecast in euro/dollar of $1.50 over the coming weeks. Trust in Europe to come through in the face of a crisis, once again."

The euro hit a session high of $1.43397 on trading platform EBS, before retreating to $1.4306, up 0.7 percent. It remains down 0.2 percent on the week.

The euro pared some of its gains after Moody's placed Italy's credit ratings on review for a possible downgrade, heightening fears of contagion.

"Contagion should not happen. As a result, I think there's going to be a package put together over the weekend, which is going to effectively offer Greece another a lifeline," said Greg Salvaggio, senior vice president at Tempus Consulting in Washington. "No one, however, is going to deal with the issue and (they will) simply kick the can down the road."

EU Economic and Monetary Affairs Commissioner Olli Rehn said euro zone finance ministers will decide on Sunday to disburse the next tranche of emergency loans to Greece in early July and decide on the new three-year bailout on July 11.

Boris Schlossberg, director of currency research at GFT in New York, said the market "underappreciates" the political risk that still exists. "If Greece's government loses a no-confidence vote, the euro would gap down. People should be cautious," he said.

The euro gained 0.8 percent to 1.2136 Swiss francs, rebounding from Thursday's record low of 1.1946.

Currency speculators slightly trimmed bets in favor of the euro in the latest week as they boosted bets against the U.S. dollar to a five-week high, data from the Commodity Futures Trading Commission showed on Friday.

Fed Policy

Developments in Europe's weaker economies will likely overshadow a two-day policy meeting by the Federal Reserve, which could shed light on the U.S. central bank's stance on the need for further steps to stimulate the flagging recovery.

The Federal Open Market Committee, the Fed's policy-setting panel, is expected to make an announcement at 2:15 p.m. (1815 GMT) on Wednesday, immediately followed by a press briefing by Chairman Ben Bernanke.

BNP Paribas said it expects the Fed meeting to prove negative for the U.S. dollar.

"With the FOMC this week likely to maintain its dovish stance and use the 'extended period' language on both rates and its balance sheet, U.S. dollar weakness is on the cards," the firm's currency strategists wrote to clients.

But they added that the dollar could regain traction if the Greece situation worsens and risk sentiment deteriorates.

The dollar fell 0.7 percent to 80.08 yen, and was on track for a 0.3 percent drop for the week.

U.S. consumer sentiment worsened this month on renewed concerns about the outlook for the economy and as gloom about job and income prospects persisted, data showed on Friday.

Next week's U.S. economic calendar includes existing and new home sales, durable goods orders, and a final reading of first-quarter growth.

[Source: By Wanfeng Zhou, Reuters, New York, 15jun11]

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