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FOREX-Euro advances for 2nd day, but gains seen limited
* Euro rises vs dollar as market pares short positions * Gains seen limited by unease about Spain, Greece * U.S. retail sales, ex-autos, show biggest fall in 2 years * Short term euro/dollar volatility still elevated By Gertrude Chavez-Dreyfuss NEW YORK, June 13 (Reuters) - The euro rose against the dollar and yen for a second straight session on Wednesday as investors continued to pare extremely bearish positions ahead of crucial Greek elections, but concerns about Spanish and Italian debt yields could spur a reversal. Investors covered their short positions on the euro ahead of the elections in Greece on Sunday, with the outcome too close to call. Syriza, the leftist party opposed to austerity measures, and the New Democracy group, which backs Greece's international bailout, are locked in a tight race and investors are only too willing to sit on the sidelines and await the results. "This rally was about short-covering. We had a sell-off earlier in the week and we were not able to get back down to the lows so the market was a little cautious ahead of the Greek election," said Jamie Coleman, currency strategist at ForexLive.com in Boston. "Market positioning is such that most of the bad news has been priced in." In late afternoon trading the euro last traded up 0.4 percent at $1.2565, its strongest gain in a week. That was well above the near two-year low touched on June 1 at $1.2288, but below a three-week high reached on Monday at $1.2671. That said, Greg Moore, currency strategist at TD Securities in Toronto, pointed out that the euro was below last week's high of around $1.2671 and very much within the weekly range. So the trend, he said, was still to sell the euro into rallies. The euro remained vulnerable. Spanish 10-year bond yields remain at lofty levels even though they were down from a euro-era record high hit on Tuesday. Some believe Spain may eventually need a full bailout if a bank rescue, announced last weekend, fails to stop the rot. Italy is also back in the headlines. Germany's finance minister said Italians must accept Prime Minister Mario Monti's tough economic measures to avoid becoming the next victim of the euro zone debt crisis. Traders said if Italian and Spanish bond yields continued to edge toward perceived unsustainable levels of around 7 percent, the euro may well come under more pressure in the near term. Italy faces a test on Thursday, when it plans to offer up to 4.5 billion euros ($5.66 billion) of fixed-rate bonds. The dollar, meanwhile, turned negative against the Japanese yen after the government reported U.S. retail sales fell for a second straight month in May. Excluding autos, retail sales showed their biggest monthly decline in two years. The dollar was down 0.1 percent against the yen at 79.45 yen , according to Reuters data. Foreign exchange trading should remain relatively subdued in the coming days, with investors hesitant to make any large adjustments ahead of this weekend, said Nick Bennenbroek, head of FX strategy at Wells Fargo in New York. "While markets will remain sensitive to any new details regarding the final assistance package for Spain's banking sector, our view remains that most foreign currencies will continue to edge higher in the coming days," he added. GREEK ELECTION In Greece, the last published opinion polls showed the conservative New Democracy party, which backs the 130-billion-euro ($160 billion) bailout that is keeping Greece afloat, running neck-and-neck with the leftist Syriza party, which wants to cancel the rescue deal but insists it wants to keep Greece in the euro zone. "The critical result from this election is not simply which party wins the most votes, but whether or not the elected parties can form a lasting coalition," said Andrew Busch, global currency and public policy strategist at BMO Capital Markets in Chicago. "Despite Syriza's popular surge, they will still need to find coalition partners in order to govern." As options traders positioned for the Greek elections, one-week euro/dollar implied volatility - a gauge of price expectations - stood at around 15.15 percent on Wednesday, down slightly from six-month highs the day before.
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