* Euro eyes biggest fall this year
* Euro zone spreads widest in years
* Chinese FX reserves hit 6-year low below $3 trln
By Jamie McGeever
LONDON, Feb 7 The increasingly unpredictable
French presidential election race unnerved European financial
markets on Tuesday, tipping the euro towards its biggest fall
this year and driving investors away from French government
The premium investors demand for buying French 10-year
government bonds over German 10-year bonds
rose to 78 basis points, the highest level since
November 2012 before easing back a bit. It was 50 basis points
only two weeks ago.
The dollar recovered from earlier losses to register its
biggest gain of 2017 against a basket of major currencies,
jumping against the offshore Chinese yuan after Beijing's
foreign exchange reserves fell below $3 trillion for the first
time in six years.
European corporate earnings offered investors some cheer -
even though oil giant BP missed estimates - helping to
steer U.S. futures into positive territory. Wall Street was
looked set to rise 0.3 percent at the open.
European trading, however, was dominated by the latest
twists in the French presidential election race, while doubts
over a rescue package for Greece also stoked concerns over the
future stability of the euro zone.
"It is clear the euro is vulnerable to political
uncertainty," Rabobank analysts said on Tuesday.
"Although opinion polls suggest that (Far-right National
Front Leader Marine) Le Pen will not win the second round of the
French presidential election in May, polls have wrongly picked
the winners of both socialist and republican primaries," they
Le Pen has vowed to fight globalisation and take France out
of the euro zone.
The election is being stirred by controversy. Conservative
candidate Francois Fillon has vowed to fight on for the
presidency despite a damaging scandal involving taxpayer-funded
payments to his wife.
Emmanuel Macron, the independent centrist candidate and
current favourite to win the election, on Tuesday knocked down
rumours he has a gay relationship outside his marriage since
The euro fell 0.8 percent to $1.0665, its biggest
fall since Dec. 15 last year, while the dollar index was up 0.7
percent, its biggest rise since Jan. 6.
The spread between Italian and German bonds
meanwhile widened to 202 basis points, the highest in three
years, while the Portuguese-German spread hit 390 basis points
for the first time in three years also.
The spreads narrowed a bit by the European mid-day.
"The acceleration of the trend of wider spreads since the
start of the year has been widespread and not just confined to
France, where obviously the political ... risk is the greatest,"
said Kenneth Broux, head of corporate research, FX and rates at
Investors initially sought the safety of U.S. Treasury and
German debt, but selling pressure mounted as stocks moved
further into positive territory. The dollar's rise dulled the
allure of gold, the traditional safe-haven asset in times of
political and economic uncertainty.
The yield on 10-year U.S. Treasuries hit a two-week low of
2.40 percent before recovering to 2.43 percent.
BELOW $3 TRILLION
European stocks extended gains, with the FTSEuroFirst 300
index of leading shares up 0.5 percent in early trade at 1435
Chipmaker AMS rose 16 percent, poised for its
best-day ever after the company's fourth-quarter revenue came in
at the top end of the chipmaker's expectations. BP was the
biggest drag on the broader index, down 2.5 percent.
MSCI's broadest index of Asia-Pacific shares outside Japan
fell 0.3 percent, while Japan's Nikkei
closed down 0.35 percent.
Data on Tuesday showed that Chinese FX reserves fell for the
seventh straight month in January and below $3 trillion for the
first time in six years.
The dollar rose 0.5 percent against the offshore yuan
, its biggest rise in three weeks. Concerns remain over
the speed at which China has depleted its cash resources to
defend the currency. Reserves were almost $4 trillion in 2014.
"The underlying pace of decline in FX reserves was $40
billion in January (vs a drop of $29 billion in December),
suggesting that capital outflows have accelerated despite
tighter capital control measures implemented in late November,"
Morgan Stanley said in a note on Tuesday.
Oil prices buckled under the dollar's gains, extending their
decline following the biggest one-day loss since Jan. 18 on
Monday as worries about rising oil supply out of the United
States tussled with optimism about output curbs elsewhere.
U.S. crude fell 0.3 percent to $52.86 a barrel, after
falling 1.5 percent on Monday. Brent fell 0.2 percent to
$55.59, after sliding 1.9 percent on Monday.
Gold fell 0.5 percent to $1,229 an ounce, after
hitting a three-month high on Monday.
(Reporting by Jamie McGeever; Editing by Jeremy Gaunt)