FOREX-Euro cedes early gains as FX derivative bets weigh

* Graphic: World FX rates in 2018 http://tmsnrt.rs/2egbfVh

By Saikat Chatterjee

LONDON, Dec 21 (Reuters) - The euro reversed its earliergains and weakened on Friday after traders failed to push thesingle currency above a key market level and large derivativebets also pulled the dollar higher.

Large options around the $1.15 levels pulled the euro EUR=EBS 0.2 percent lower at $1.1423 and nearly half a percentbelow the day's high of $1.1474 in early London trading.

The euro's sudden weakness boosted the dollar which gained0.3 percent against a basket of its rivals .DXY at 96.58.Despite, the dollar's bounce, the greenback remained on trackfor its biggest weekly drop in four months.

"Some large currency options around the $1.15 levels areexpiring today and that is pulling the euro lower as banks areactively looking to defend that level," said a trader at aEuropean Bank in London.

The magnitude of options in currencies can be a big factorfor trading as banks selling such products would actively try toprevent the market from triggering those derivatives as it wouldfuel broader volatility as traders rush to cover their bets.

About $6 billion of currency options are set to expirebetween $1.1450-1.1500 levels later in the day, according toRefinitiv data, far more than what has been traded in recentmonths.

Even technical charts are proving to be a significantheadwind for the euro.

The single currency has failed to break above a 100-daymoving average after falling below it in September. On twooccasions in mid-October and this week, the euro has testedthose levels and fallen back. That level is at $1.14844 onFriday.

But despite the dollar's bounce, markets remained wary ofpushing the greenback higher as the threat of a U.S. governmentshutdown and lower bond yields on the back of concerns ofslowing economic growth weighed on sentiment.

"I think the markets are focusing more now on U.S.economy-specific risk rather than global economy risks and thatis weighing on the dollar," said Thu Lan Nguyen, an FXstrategist at Commerzbank in Frankfurt.

The safe-haven Japanese yen JPY=EBS benefited from thenervous sentiment, steadying broadly against the dollar to111.21 yen.

Adding to pressure on the dollar was news that U.S.President Donald Trump has refused to sign legislation to fundthe U.S. government unless he gets money for a border wall withMexico, risking a partial federal shutdown on Saturday.

The pound GBP=D3 was flat at $1.2661. (Reporting by Saikat Chatterjee; Editing by Kevin Liffey andJon Boyle) ((saikat.chatterjee@thomsonreuters.com; +44-20-7542-1713;Reuters Messaging: saikat.chatterjee.reuters.com@reuters.net))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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