* Euro rallies after French, German meeting in Berlin
* Market talk of larger bailout boosts single currency
* Greek govt vote of confidence looms after reshuffle
By Nia Williams
LONDON, June 17 (Reuters) - The euro rose on Friday on speculation of a new Greek aid package and as Germany pledged to work with the European Central Bank to resolve the debt crisis, but it remained vulnerable to a sell-off in the absence of a concrete solution.
The single currency rose 0.5 percent to a session high against the dollar of $1.4283, recovering smartly from a low of $1.4127 in late Asian trade.
It also turned positive against the Swiss franc to reach 1.2121 francs, up from Thursday’s record low of 1.1946, and rose 0.4 percent against sterling to reach 88.28 pence. It was also slightly firmer against the yen at 114.64 yen .
German Chancellor Angela Merkel met with French President Nicholas Sarkozy on Friday and they afterwards told a news conference a solution had been agreed in line with the so-called “Vienna Initiative.”
Analysts said the comments were nothing new but European shares turned positive and Greek bond yields and CDS fell as risk appetite improved across the asset classes.
“You could argue Merkel’s acceptance of the Vienna initiative is somewhat of a climb down and we are moving closer to something more concrete,” said Adrian Schmidt, FX strategist at Lloyds.
“They are trying to create a positive spin but the issue is can they achieve a version that’s acceptable to ratings agencies and the ECB.”
Under the “Vienna Initiative” for central and eastern Europe, international lenders agreed in 2009 to boost credit to the region and the main commercial banks in turn committed to maintain exposure and roll over credit lines.
The single currency has been hampered in recent weeks by discord between the euro zone’s paymaster Germany and the European Central Bank, backed by France.
Germany has been insisting banks, pension funds and insurance firms that hold Greek debt swap their bonds for new ones with longer maturities.
But fearful this solution could create a “credit event” that would prompt rating agencies to label Greece in default, the ECB, European Commission and France all favour a softer option in which holders of Greek bonds would be asked to buy new Greek debt as their holdings mature.
Schmidt said investors were unlikely to sell into the euro rally as people did not want to hold positions over the weekend while event risk remained high.
The euro was also boosted by a bout of short covering triggered by speculation of a new Greek aid package that would be larger than previously thought. 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.
“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.”
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.
The Greek cabinet, reshuffled on Friday, will face a vote of confidence by Tuesday night. The political moves could be another potential flashpoint in a country already beset by fierce anti-austerity strikes.
Markets will keep a close eye on the Monday’s meeting and the Greek vote for further clues on how policymakers will proceed in dealing with the debt crisis.
The euro’s bounce saw the dollar index cede ground. It was last down 0.8 percent at 75.156 while against the yen, the greenback was down 0.4 percent at 80.27 yen.
The slight improvement in risk appetite boosted the commodity currencies, pushing the Australian dollar up 0.5 percent to $1.0612. The New Zealand dollar also rose 0.4 percent to $0.8082. (Reporting by Nia Williams; Editing by Toby Chopra)