May 19, 2020 / 12:28 PM / 18 days ago

FOREX-Euro rallies on Franco-German proposal for recovery fund

* Dollar falls after successful COVID-19 vaccine trial

* Australian, New Zealand dollars up as trade risks fall

* Swedish, Norwegian crowns inch to 2-month highs

* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh (Updates prices, adds comment and chart)

By Olga Cotaga

LONDON, May 19 (Reuters) - The euro rallied on Tuesday, propelled by a Franco-German proposal on Monday for a fund that would offer grants to European Union regions and sectors hit hardest by the coronavirus pandemic.

The common currency was also buoyed by weakness in the dollar, which lost its safe-haven appeal after encouraging results from the trial of a vaccine for COVID-19 boosted riskier assets.

Germany and France, whose agreements usually pave the way for broader EU deals, proposed that the European Commission borrow the 500 billion euros ($550 billion) on behalf of the whole EU. The Commission is expected to outline their proposal before a European summit scheduled for May 27.

The euro last bought $1.0952 after rising to a two-week high of $1.0976 earlier. And the cost of betting against the euro versus the dollar in currency-derivatives markets fell on Tuesday to the lowest since mid-March.

“The Franco-German proposal represents a material step forward towards harnessing joint fiscal capacity to provide sustained fiscal stimulus to support the economic recovery,” said Lee Hardman, currency analyst at MUFG.

Still, with one-month and three-month risk reversals remaining below zero, traders were continuing to request a premium for euro put options, implying more bearish bets on the common currency.

Although Vasileios Gkionakis, global head of FX strategy at Lombard Odier, said he would be surprised if investors were short the euro at current levels.

Speculators held $10.6 billion of euro longs according to latest CFTC data, volumes close to two-year highs.

The euro was 0.3% higher versus the Swiss franc at 1.0633 , after rallying to an 11-week high the day before.

Gauges for overnight euro implied volatility rose to a three-week high of 9.10%, suggesting traders were expecting bigger-than-usual moves in the common currency on Tuesday.

The dollar was down 0.2% against a basket of currencies at 99.42, having touched a two-week low of 99.22 earlier.

Moderna Inc’s experimental COVID-19 vaccine, the first to be tested in the United States, produced protective antibodies in a small group of healthy volunteers.

“The market’s positive reaction to the report is understandable as finding a vaccine for COVID-19 is the search for the Holy Grail. It would allow a return to normal at a much faster pace and significantly reduce long-lasting damage to the global economy,” Hardman said.

With governments scaling back lockdown restrictions, investors grew optimistic that economies could soon return to normal.

Trade-sensitive currencies such as the Australian dollar rose to a three-week high of 0.6564. The New Zealand dollar was last up 0.7% at 0.6081.

The Swedish and Norwegian crowns rose by 0.6% each to two-month highs . ($1 = 0.9142 euros)

Reporting by Olga Cotaga Editing by Kevin Liffey

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