LONDON (Reuters) - The euro fell from a one-month high against the dollar on Monday as relief at the election win for pro-bailout parties in Greece quickly gave way to fears over Spain's borrowing costs, which surged to levels seen as unsustainable.
While the election result allayed immediate fears of Greece being forced out of the euro zone, uncertainty persisted as the winning centre-right New Democracy party must now try to cobble together a government with other parties backing the international bailout.
Analysts said the new government could not hope to deliver on more austerity measures with the economy mired in recession. Europe's paymaster Germany is still opposed to giving any leeway on tough bailout conditions that have been agreed between Greece and its international lenders.
Market players were also concerned about the euro zone's ability to respond to the risk of contagion engulfing larger economies like Spain and Italy. All of which is likely to see investors sell into any near-term bounce by the euro.
"The euro is already off...displaying that while we have a decent result in the Greek election, everybody knows it's going to be a long, rocky road and we are nowhere near the end of Greece's problems," said Jane Foley, senior FX strategist at Rabobank.
"Even if we carry on getting a better outcome with respect to Greece we have still got Spain and problems there."
The euro was flat on the day at $1.2640, off a one-month high of $1.2748 struck in the Asian session on trading platform EBS, as it came under pressure on reported selling by Asian sovereign investors.
It fell past reported stop-loss orders around $1.2660-70 to $1.26205 in the European session with support expected around the June 13 high of $1.2611.
Ten-year Spanish government bond yields, hit by persistent concern about the country's fiscal and banking problems, rose above the 7 percent line seen as unsustainable in the long-term and at which other peripheral euro zone nations have sought bailouts.
Despite the problems facing the bloc, some strategists saw potential for the euro to rise given a build-up of huge bearish positions in the common currency, taken on concerns that a win for anti-bailout parties could lead to Greece rejecting austerity measures and leaving the euro.
"In the short term, a short squeeze or speculation about quantitative easing by the Federal Reserve could give the euro a lift, but in the medium term it is a sell because Europe's problems are deep-rooted and will not go away," said Howard Jones, adviser at RMG Wealth Management.
"Any rebound to around $1.2800 is a selling opportunity."
Positioning data showed speculators' massive net short positions of 195,187 contracts last week, even after having trimmed them from the previous week's record high of 214,418 contracts.
QE RISK MAY HELP EURO
In the options market, near-term implied volatilities fell, with the one-week easing to 12.25 percent from a high of around 17 percent last Thursday, while the one-month slipped to 11.55 percent from around 12.6 percent on Friday. But one-month risk reversals pointed to a bias for euro weakness.
European finance ministers meet on Friday and a summit is scheduled for the end of this month, but little is expected in the way of fresh policy measures towards a banking union or greater fiscal integration like common eurobonds.
Traders expect some volatility in the currency market in coming days. The common currency could benefit versus the dollar on speculation that the U.S. Federal Reserve may opt for more easing to boost growth.
Many market players expect the Fed to extend its long-term bond-buying through Operation Twist by a few months from the current deadline of June, after a series of disappointing data. Additional easing by the Fed could also support other perceived riskier currencies against the greenback.
The dollar index was flat at 81.638 after hitting a one-month low of 81.188 . The Australian dollar was up 0.2 percent at US$1.0104, off a one-month high of US$1.0135.
"There's a chance the Fed could adopt more of an easing bias at its policy meeting on Wednesday, and that should cap the dollar for now," said Peter Dragicevich, an FX economist at Commonwealth Bank of Australia.
The safe-haven yen fell against the euro to 100.05 yen and against the dollar to 79.13 as a result of the initial risk-positive reaction to the Greek vote.
(Additional reporting Nia Williams; Editing by Hugh Lawson)
