* French, German leaders say in agreement on Greece aid
* Market talk of larger bailout boosts single currency
* Greek govt vote of confidence looms after reshuffle (Recasts, updates prices, adds details and quote)
NEW YORK, June 17 (Reuters) - The euro rallied for the second straight day on Friday as hopes for a new Greek aid package rose after Germany and France pulled together on a rescue approach, although the currency remained vulnerable absent a concrete solution.
German Chancellor Angela Merkel and French President Nicholas Sarkozy said on Friday that they were united on an aid package for Greece that would include voluntary private sector participation.
The euro extended gains and rose to a session high against the dollar after a report showing U.S. consumer sentiment worsened more than expected in June on concerns about the U.S. economic outlook. [ID:nN17219319]
The International Monetary Fund’s lowered forecast for U.S. economic growth, spelled out on Friday in its regular assessment of global economic prospects, also pressured the dollar. [ID:nEBE7DA01M].
Merkel and Sarkozy’s endorsement of a “Vienna-style” rollover of Greek debt offered encouragement on an emerging consensus on Greek aid, said Mark McCormick, currency strategist at Brown Brothers Harriman.
The two European leaders said their agreed solution for Greece was in line with the “Vienna Initiative,” a 2009 pact under which international lenders agreed to boost credit for central and eastern Europe and the main commercial banks committed to maintain exposure and roll over credit lines.For more see [ID:nB4E7GN04A] and [ID:nLDE75G0UT].
But McCormick added a note of caution, saying: “While we still believe that a new Greek package will be forthcoming, we warn of ongoing headline risk from rating agencies, the IMF, euro zone politicians and the ECB.”
The euro posted a session high of $1.43397 on electronic trading platform EBS. It last traded at $1.43286, up 0.9 percent EUR=EBS.
It also gained against the Swiss franc EURCHF=EBS, last trading up 0.6 percent at 1.21190 francs, up from Thursday’s record low of 1.1946 on electronic trading platform EBS.
The euro has been hampered in recent weeks by discord between euro zone paymaster Germany and the European Central Bank, backed by France, and even with Friday’s gains against the dollar it was little changed on the week.
The dollar fell against the yen, down 0.6 percent at 80.11 yen on Friday, taking another leg down after the IMF comments on U.S. growth, and was on track for a 0.2 percent drop for the week. JPY=.
“It adds to the story of dollar weakness today,” said John Doyle, strategist at Tempus Consulting in Washington of the IMF comments.
The IMF also warned Washington and debt-ridden European countries that they are “playing with fire” unless they take immediate steps to reduce their budget deficits. [ID:nEBE7DA01M].
But the euro dominated investors’ focus, benefiting from a bout of short-covering triggered by speculation of a new Greek aid package that would be larger than previous expectations. Traders cited market talk of a 150-billion-euro aid package for Greece, although this could not be confirmed.
“When you get sharp moves on market talk it captures the highly nervous market environment,” said Audrey Childe-Freeman, head of currency strategy at JP Morgan Private Bank in London.
“Yesterday was very much doom and gloom and we are bound to see some bounces back but until we get a firm conclusion about the Greek situation the market will remain suspicious.”
EU Economic and Monetary Affairs Commissioner Olli Rehn said euro zone finance ministers will decide at a meeting 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. [ID:nBRU011555]
The Greek cabinet, reshuffled on Friday, will face a vote of confidence by Tuesday night. [ID:nLDE75G0CY] (Reporting by Nick Olivari; Additional reporting by Nia Williams in London; Editing by Leslie Adler)