Euro bounce proves brief after pro-Europe parties retain majority

LONDON (Reuters) - The euro struggled to cling on to gains on Monday as investor relief at limited success for eurosceptic parties in European parliamentary elections was offset by a decline in the share of seats held by the biggest blocs.

Center-right and center-left blocs lost their shared majority, but surges by the Greens and liberals meant parties committed to strengthening the union held on to two thirds of seats, official projections showed.

The single currency initially rose as high as $1.1215, off two-year lows of $1.1105 touched on Thursday.

But it later fell to stand 0.1% down at $1.1197 in subdued trading because of market holidays in London and New York.

"If anything, it was positive that the populists didn't gain more than they did," said Christin Tuxen, an FX analyst at Danske Bank.

(GRAPHIC: Euro vs U.S. dollar - https://tmsnrt.rs/2W3k0aS)

The euro did hold on to gains against the Swiss franc and was last up 0.3% at 1.1256 francs.

The election results dented the hopes of anti-immigration, anti-Brussels parties, including those in France and Italy, despite topping the polls in their respective countries.

Tuxen said the election, normally of limited interest to global markets, was the first of a series of meaningful political events in Europe this year, though signs of slowing economic momentum mean that monetary policy still matters more.

"What is really going on in the FX market is we are waiting to hear if there will be a Fed (U.S. Federal Reserve) reaction to the deteriorating cyclical outlook," Tuxen said, pointing to rising expectations of a cut to U.S. interest rates later this year.

The dollar index rose 0.1% to 97.705.

The U.S. currency rose 0.1% against the Japanese yen to 109.45 yen, buoyed by bargain-hunting Japanese investors.

Despite Monday's gains, the dollar is not far from the three-month low of 109.02 yen touched two weeks ago amid escalating tensions between Washington and Beijing over trade and technology.

The dollar's strength was also capped after U.S. President Donald Trump used his Tokyo visit to press Japan to take measures to reduce its trade surplus with the United States.

The pound slipped as low as $1.2673, retreating after early gains. The British currency bounced on Friday after Prime Minister Theresa May set out a date for her departure, but sterling remains near 4-1/2 month lows.

The prospect of a "no-deal" Brexit is fast becoming the defining issue of the race to succeed May, keeping the pound under pressure.

"Sentiment towards the pound is still negative," said ACLS Global analyst Marshall Gittler, citing option market data signals that people were buying insurance against a further fall in the pound and positioning data showing a big increase in short positions against the British currency.

China's onshore and offshore yuan strengthened to a 1-1/2 week high, buoyed by a senior official's warning not to bet against the currency.

(Editing by John Stonestreet and David Goodman)

05/27/2019 12:55

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