2012.05.04 22:23:08 FOREX WEEK AHEAD: Euro May Face Test Following Elections

By Matthew Walter Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--The euro may come under pressure next week when newly elected leaders in France and Greece begin to lay out more concrete plans to boost growth in a move investors worry could disrupt regional cooperation to reduce budget deficits. Over the weekend, French voters are expected to elect Socialist party candidate Francois Hollande, replacing incumbent President Nicolas Sarkozy, who forged a strong alliance with Germany during the euro zone's recent debt crisis. In Greece, the concern is the two main parties may not obtain a majority, sowing doubt about the future of austerity plans agreed to in exchange for debt relief. These newly elected European leaders will set the tone for trading of the euro early in the week after the common currency has remained in a tight range against the dollar for several months. "It's hard to see how these political events can be significantly positive for the euro," said Nick Bennenbroek, head of currency strategy at Wells Fargo in New York. "We'll be watching the elections, and watching the mood." According to data from the Commodity Futures Trading Commission, investors have held a net short position in the euro all year, a bet the currency will weaken against the dollar. Even so, concern the Federal Reserve might unveil more policies to stimulate growth and weaken the dollar have prevented the euro from falling dramatically. Should the euro break below $1.2974 in the coming week, the lowest it has traded in recent months, it would open the door for the currency to weaken significantly, Bennenbroek said. Aside from the political events, currency investors are set to pay close attention to economic indicators in the euro zone and China. The latter will report industrial production, retail sales, inflation and investment figures May 11, possibly providing an indication of whether a slowdown in the world's second-biggest economy is reversing. Any improvement in China's economy would boost currencies from emerging markets, and commodity exporters that sell products to China, said Aroop Chatterjee, foreign-exchange strategist at Barclays in New York. "Global growth is looking a little bit weaker, and it has been taking a bit of wind out of the sails for currencies from commodity countries," he said. The Australian dollar, which rallied on surging Chinese demand for the country's raw materials in the past few years, is especially sensitive to changes in China's growth outlook. The Aussie dollar Friday slumped to $1.0180, its lowest level since Jan. 9. In the U.S., the main driver for the dollar in the coming week may come May 10, when Federal Reserve Chairman Ben Bernanke is scheduled to give a speech in Chicago. The greenback has steadily declined against the yen since mid-March, with investors divided over whether the U.S. economy is weak enough for the Fed to boost growth by expanding its bond purchasing program, known as quantitative easing, which lowers interest rates and tends to weaken the dollar. While a Friday report on the labor market fell short of expectations, the overall unemployment rate continued to decline. That may leave the dollar "stuck between sub par economic prospects, and little chance of more monetary policy easing," Chatterjee said. -By Matthew Walter, Dow Jones Newswires; 212-416-2910; matt.walter@dowjones.com (END) Dow Jones Newswires May 04, 2012 16:23 ET (20:23 GMT)