Euro lifted by Greek bailout approval as calm returns to FX markets

[August 14, 2015] By Anirban Nag

LONDON (Reuters) - The euro rose on Friday after Greece's parliament gave approval to a new bailout agreement, with relative calm returning to currency markets after a week that saw China devalue the yuan, sending ripples through global financial markets.

The euro hit $1.1185, on track for its best weekly gains against the dollar since mid-May, having already got a lift this week as investors unwound euro-funded carry trades in the yuan <EURCNH=> and other emerging market currencies, which were hit hard by the Chinese devaluation on Tuesday.

Emerging Asian currencies continued to fall on Friday, on track for steep weekly losses, with the Malaysian ringgit <MYR=> skidding to a new 17-year low.

On Friday, the People's Bank of China set the yuan midpoint at 6.3990 yuan to the dollar, slightly stronger than Thursday's levels.

Beijing's moves eased concerns that a cheaper yuan could trigger a "currency war", or a competition among the world's biggest economies to cheapen their own currencies to seek a competitive edge for their exports. Nevertheless, investors preferred to remain cautious before the weekend.

"It is not a good time to sell the euro against the emerging market currencies," said Yujiro Goto, strategist at Nomura.

"Chinese markets have stabilized, with the yuan mostly flat. There is a bit of position adjustment going on the euro/dollar with recent U.S. data, like jobs and retail sales, not exactly giving a clear direction to when the U.S. will lift rates."

Earlier, Greek Prime Minister Alexis Tsipras's government secured enough votes to win parliamentary approval thanks to opposition support, just hours before euro zone ministers are due to approve the deal and pave the way for disbursement of aid ahead of a debt payment next week.

The news came after second-quarter growth data from France and Germany disappointed. That saw the euro zone expanding at 0.3 percent, quarter-on-quarter, compared to a forecast for a 0.4 percent rise.

UNCERTAINTY

The euro's gains saw the dollar index drop 0.3 percent to trade 96.119, with the greenback also losing 0.3 percent against the yen to trade at 124.11 yen.

The dollar has put in a lackluster performance this week after China's surprise devaluation, and worries about a global slowdown and disinflation led some investors to question the timing of the Federal Reserve's increase in interest rates.

"While the uncertainty surrounding a September lift-off has increased after the shock yuan devaluation, the policy divergence trade is still alive," analysts at Credit Agricole said in a note.

"Improving U.S. data in the coming days should support that view. By the same token, abating FX volatility on the back of a more gradual yuan adjustment and/or stabilizing macro data outside the U.S. could restore investors' confidence in the policy divergence trade, boosting the dollar."

(Editing by Gareth Jones)

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