The euro struggled to extend its initial gains Monday as concerns started building about the coming days of negotiations in Athens, but relief over the favorable outcome of the Greek elections pushed higher yielding currencies such as the Australian dollar sharply higher.
The single currency initially lurched lower as early exit polls Sunday indicated the result of Greece's crucial election was too close to call, falling as low as $1.2520 against the dollar. But it cranked higher as it emerged that the pro-bailout New Democracy party had eked out a narrow win.
Still, the rally left the euro just a whisker above the levels it held late in New York Friday, with it trading at $1.27. Concerns over whether New Democracy will be able to form a coalition in the days ahead, and fears the new government in Athens could be fragile and short-lived were weighing against any bigger rally for now, analysts agreed.
"It remains to be seen how stable any new Greek government proves to be with ongoing fiscal consolidation likely to further encourage social unrest, boosting Syriza's support in opposition," said Lee Hardman, a currency strategist at the Bank of Tokyo Mitsubishi-UFJ in a research note.
Other events in the euro zone are also likely to distract investors from Greece, with Spain and Italy still very much in focus as a two-day meeting of leaders of the Group of 20 industrial and developing nations gets underway in Mexico Monday.
"There will likely be talk surrounding events from Europe but it seems unlikely any significant action will be announced ahead of Thursday's Eurogroup meeting and the European Union summit next week," said analysts at Lloyds Bank in a note to clients.
The relief rally was more pronounced in the Australian dollar and emerging market currencies, such as the Hungarian forint and the South African rand. The forint gained over 1.1% against the euro and hit a one-month high after Greece's election results had been published, while the rand motored some 1.5% higher against the dollar in the wake of the news.
The euro traded as low as HUF290.04, compared with HUF293.55, at the close of trading Friday, while the dollar sank to ZAR8.2349 from ZAR8.3477 late Friday. The Australian dollar was also trading at a one-month high at $1.0135, compared with $1.0085.
As a further sign of easing fears in the market Monday, demand for options-based protection against sharp euro moves tumbled sharply. The one-week implied volatilities contract has slumped from 16% at Friday's close to open Monday at 12.5%.
