By William L. Watts and Lisa Twaronite, MarketWatch
FRANKFURT (MarketWatch) — The euro turned higher versus major rivals Wednesday on growing expectations Greece’s parliament will approve an austerity plan deemed necessary to allow the debt-strapped country avoid default.
The 300-member parliament is expected to vote Wednesday afternoon on a 78 billion euro ($111 billion) package of additional austerity measures and government asset sales against a backdrop of anti-austerity demonstrations on the second day of a nationwide strike. Read "What happens if Greece votes no on austerity"
EURUSD 1.4389, +0.0018, +0.1241%
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The euro EURUSD +0.12% erased an earlier loss to trade at $1.4398, up from $1.4366 in late North American trading on Tuesday. See real-time currency quotes and tools.
European equity markets were higher, following gains scored on Tuesday, while spreads between German government bonds, or bunds, and most peripheral euro-zone bonds narrowed as investors unwound safe-haven flows.
Kit Juckes, head of forex strategy at Societe Generale, said investors had built up short positions in risk-associated assets, such as equities and the euro, leading to a short-covering rally as market participants began to anticipate a “yes” vote by the Greek parliament. If the plan is approved Wednesday, lawmakers will vote Thursday on legislation implementing the measures.
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Greek protest turns violent
Demonstrators clash with riot police as Greece braces for austerity cutbacks.
“A positive outcome is more likely than a negative one, and has a correspondingly smaller impact” Juckes said, in a note to clients. A ‘no’ vote “takes [euro/dollar] down through $1.40 and into freefall. ‘Yes’ allows us to look forward to the next vote, tomorrow. Maybe $1.45 will be tested again.”
Despite earlier threats from some members of his own PASOK party to vote against the package, the Associated Press reported that Prime Minister George Papandreou appeared on track to maintain the support of all but one PASOK member in Wednesday’s vote.
Approval of the plan is a prerequisite for the release of a delayed €12 billion tranche of financial aid from the European Union and the International Monetary Fund that Greece needs in order to meet its July debt obligations. EU officials have warned that failure to pass the measures would result in default.
“We expect both today’s and tomorrow’s votes to get through parliament, though it will not be easy,” said Sue Trinh, senior currency strategist at RBC Capital Markets.
“The margin may be tight, but we think the threat of default will ultimately swing the vote in favor of the measures. If realized, it will be a near-term positive for [euro] and risk,” she said in a note to clients.
The dollar index DXY -0.10% , which measures the performance of the U.S. unit against a basket of six other currencies, fell to 74.869 from 75.059 late Tuesday.
“The dollar struggled yesterday, falling back across the board, in part because of more optimism from Europe, but also because of more weak U.S. data and perhaps because of end of half-year flow,” said Adrian Schmidt, currency strategist at Lloyds Bank in London.
The market focus on Wednesday will be on the Greek vote, but the dollar index’s “serial failures” to break back above the 76.00 level suggest a fall back toward the June lows below the 74.00 level unless the austerity measures fail, Schmidt said.
The Australian dollar AUDUSD +0.51% rose to $1.0592 from $1.0546.
The British pound GBPUSD +0.07% rose to $1.6006 from $1.5945.
Against the yen, the dollar USDJPY +0.05% bought ¥81.03, compared with ¥81.14 late Tuesday.
William L. Watts is a reporter for MarketWatch in Frankfurt.
Lisa Twaronite is MarketWatch's Tokyo bureau chief.
