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Euro edges up, political instability in Greece seen checking gains

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The euro edged higher against the dollar on Wednesday, but investors remained nervous over an uncertain political situation in Greece and some looked to sell into any bounce in the single currency.

The euro was up 0.15 percent against the dollar at $1.2390, having fallen to $1.2365 earlier in European trade after Greek bond yields rose. It stayed well below a high of $1.2448 struck on Tuesday as investors trimmed long dollar positions, booking profits ahead of the year-end.

The euro was down 0.35 percent against the yen at 147.60 yen.

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The Greek government has brought forward to next week a presidential vote that will force nearly two dozen independent lawmakers to decide whether to side with Prime Minister Antonis Samaras' pro-bailout cabinet or with leftist radicals who have vowed to tear up the bailout.

The decision prompted the steepest daily fall in Greek stocks on Tuesday in more than a quarter century and a jump in bond yields.

Some investors and speculators have taken the opportunity to place fresh bets against the euro, which has shed nearly 10 percent against the dollar this year.

"The Greek situation is coming back to haunt the euro," said Niels Christensen, FX strategist at Nordea.

"Also, for the euro, if there are not too many banks lining up for cheap long-term loans that are on offer from the ECB tomorrow, pressure on the central bank will grow to ease further. And that is not good for the euro," he added.

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On Thursday, the ECB conducts its second targeted long-term refinancing operation. Over time, expectations have been decreasing to as low as 130 billion euros in the latest Reuters poll, substantially missing volumes desired by the ECB.

The ECB had intended to expand its balance sheet sharply by offering these cheap loans to banks and flooding the system with euros, driving down the value of the common currency.

The dollar fell 0.5 percent against the yen to trade at 119.10. At one point on Tuesday, it dropped more than 2 percent to 117.90 in a vicious turnaround from a seven-year peak of 121.86 set on Monday.

"The drop by dollar/yen was shocking. It was a reminder of how scary the market can become when positions are tilted suddenly in one direction," said Bart Wakabayashi, head of forex at State Street in Tokyo.

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