The euro held its ground yesterday despite mounting political turmoil across the euro zone.
German Chancellor Gerhard Schröder called for an early general election after seeing his Social Democratic party suffer a crushing defeat in its erstwhile stronghold of North-Rhine Westphalia, Germany's most populous state.
Opinion polls also continued to show that voters in France and the Netherlands are likely to reject the proposed European Union constitution in forthcoming referendums.
But with German equities rising in the belief that an early election will speed Mr Schröder's exit from power and accelerate the pace of economic reform, the euro actually firmed a fraction to $1.2568 against the US dollar, still near a seven-month low, and held steady at £0.6868 against sterling, while dipping just 0.3 per cent to Y135.36 against the yen.
"An incoming CDU government will have no excuses not to reform Germany," said Hans Redeker, global head of forex strategy at BNP Paribas.
"I think this will be positive for Germany," added Chris Towner, consultant at HIFX.
The euro was aided by data from the US Commodity Futures Trading Commission that showed speculative net euro positions were at their shortest since December, reducing the scope for further shorting.
In contrast, net long positions on the dollar were at their most extreme since July 1999, jumping to $12 billion, as of May 17th, from $0.7 billion a week earlier.
This extreme positioning was seen as the prime cause of the dollar's slight fall from grace yesterday, which occurred despite broadly positive dollar sentiment in the market.
BNP Paribas yesterday cut its euro/dollar forecast for the end of the second quarter to $1.21 from $1.28, despite predicting a rate of $1.40 by 2006. - (Financial Times Service)
