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COLUMN-Euro gets by, with a little help from its friends

(The opinions expressed here are those of the author, a columnist for Reuters.)

* Euro and current account surplus: bit.ly/2nB21Tr

* Czech and Swiss foreign reserves: bit.ly/2mHJV4A

By Mike Dolan, European Markets Editor

LONDON, March 15 Zero interest rates, political risk and an uncertain future? The euro currency is holding up quite nicely for all that, with perhaps a little help from its near neighbours.

Widespread fears that 2017's packed European electoral calendar poses a threat to the single currency with rising support for eurosceptic populists across the continent appears to be having little direct impact on the currency itself.

The European Central Bank's euro exchange rate index is actually 0.3 percent stronger since the end of last year. Only one of 50 trading days so far in 2017 has seen a move in that index of more than 1 percent -- and that was a gain.

Euro/dollar - the pivotal transatlantic exchange rate - has traded mostly in a four cent range since the dollar surge after U.S. elections last November -- a swing of less than 2 percent either side of $1.06 for over four months now.

Even readings of implied volatility on a 3-month horizon , derived from the options market, remain subdued below 10 percent -- almost half the seismic readings seen at the peak of euro debt crisis in 2011.

Deeper in, a long-standing price premium on 'put' options to sell euros had been climbing through January and February. But that too reversed over the last three weeks and has returned to end-2016 levels.

Could it be that no one in the currency market is bothered by the anti-euro ire of increasingly popular far right leaders such as France's Marine Le Pen or Geert Wilders in The Netherlands? Is everyone really relaxed about German elections that could unseat Chancellor Angela Merkel or the prospect of snap elections in Italy this summer?

Well, not so. Weekly data from the U.S. Commodity Futures Trading Commission gives a snapshot of speculative thinking at least. It shows the largest net short positions against the euro last week since early January.

Politics aside, it's also not hard to see a negative tilt toward the euro with the widest 2-year interest rate gap in favour of dollars in the life of the single currency and monetary policy diverging.

Debt markets have registered the political anxiety more clearly. Ten-year French sovereign debt spreads over Germany -- while still well below the peaks of 2011 -- have doubled over the past four months to more than 60 basis points.

So what is holding up the euro so effectively?

STANCHING THE FLOW

The most fundamental explanation is the ballooning of the euro zone current account surplus over the past five years to now register net monthly inflows over outflows in excess of 30 billion euros. It is a substantial natural support averaging a billion euros per day compared with external accounts that were just about in balance during the blowout in 2011.

Relatively weak domestic demand for imports and strong German exports partly explain that surplus. But so too does euro zone governments now paying near zero or even negative returns to foreigners holding their bonds while euro area investors suck in much higher returns from equivalent holdings abroad.

The stable exchange rate suggests any capital seeping out the bloc for political or relative interest rate reasons can't have exceeded that surplus drawing inflows against it.

Partly responsible for the seeming disconnect is a tendency for big overseas debt investors to switch within the euro area rather than flee it altogether -- as seen with reports that Japanese investors dumped French government bonds in recent months but bought twice as many German bunds.

But the other tourniquet limiting the outflow has been the behaviour of two giant marginal buyers of euros -- the Swiss National Bank and its Czech counterpart.

Although the SNB technically abandoned its fixed cap on the franc against the euro in 2015, it continues to amass vast stores of euros via ad hoc intervention to prevent excessive franc strength. Now in excess of 600 billion euros, Swiss foreign reserves have increased by more than a hundred billion euros, or more than 20 percent, over the past 14 months alone.

And even though it's committed to abandoning it this year, the Czech central bank's self-imposed, three-year old cap on the crown has seen it balloon its foreign currency reserves by 46 billion euros, or by 80 percent, since the start of last year -- to more than 100 billion euros last month. That's some 60 percent of Czech gross domestic product.

Taken together, the two central banks have averaged monthly accumulation of close to 13 billion euros. About half that is banked in euro debt markets, a significant marginal offset to capital flows from the zone.

Capital flight could ultimately weaken the euro -- but the scale of that movement now clearly has to be huge to have a durable impact on the exchange rate. (Editing by Jeremy Gaunt)

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