Euro Rises as European Leaders Work to Set Up Emergency Funding Measures

By Yoshiaki Nohara and Candice Zachariahs - May 09, 2010


The euro rose as European leaders moved toward agreement on a loan package worth at least $645 billion to prevent Greece’s fiscal woes from triggering a broader sovereign-debt crisis.

Europe’s common currency gained against 14 of its 16 major counterparts as European Union government officials said the International Monetary Fund may add money to the emergency facility agreed to by European finance ministers. The yen slid against all 16 major counterparts as prospects the Greek crisis won’t spread damped demand for Japan’s currency as a refuge.

“The fact they’ve been trying to put together something over the weekend is very positive,” said Phil Burke, chief dealer for global foreign exchange and rates at JPMorgan Chase in Sydney. “Risk has been put back on. The market seems to be happy to take back some of the short positions on the euro.”

The euro climbed to $1.2878 as of 8:02 a.m. in Tokyo from $1.2755 on May 10, after falling 4.1 percent last week, the most since the five days ended Oct. 24, 2008. The 16-nation currency rose to 118.69 yen from 116.81 yen. The dollar gained to 92.15 yen from 91.59 yen.

European officials declined to disclose the size of the stabilization fund, to be made up of money borrowed by the EU’s central authorities. The mechanism may be worth 500 billion euros ($645 billion), said a government official familiar with the talks in Brussels.

‘Fortunes of Euro’

“Markets’ assessment of the effectiveness of the package will be critical to the fortunes of the euro, equity markets and risk appetite early in the week,” Mike Jones, a currency strategist at Bank of New Zealand Ltd. in Wellington, wrote in a note to clients.

Futures traders increased bets to a record that the euro will fall against the dollar in the days after the May 2 announcement of a 110 billion-euro bailout package for Greece on speculation the aid wouldn’t be enough to halt the spread of the region’s fiscal woes.

The number of wagers by hedge funds and other large speculators for a decline in the currency rose on May 4 to 103,402 contracts more than those anticipating a gain, up from 89,013 a week earlier, according to Commodity Futures Trading Commission data. It was the second consecutive week that the amount climbed to a record. As recently as December, traders were anticipating gains in the euro.

‘Blood on the Street’

“There was blood on the street,” Samarjit Shankar, a managing director for the foreign-exchange group in Boston at Bank of New York Mellon, the world’s largest custodial bank, with more than $20 trillion in assets under administration, said May 7. “The focus has been on the inability of European policy makers to come up with something coherent to try to calm investor nerves.”

The extra yield that investors demand to hold Greek, Portuguese and Spanish 10-year debt instead of benchmark German bonds rose to the highest last week since before the euro’s 1999 debut as European leaders’ efforts failed to assuage concern that the region’s most-indebted nations will struggle to reduce their budget deficits. The yield on Germany’s 10-year bund fell to a record.

“We will defend the euro, whatever it takes,” European Commission President Jose Barroso told reporters on May 8 after the leaders met in Brussels.

Led by Italy’s $126 billion, Greece, Spain, Portugal, Ireland and Italy have a total of $215 billion of debt coming due in the next three months, according to JPMorgan Chase & Co.

‘Rates Appropriate’

Europe’s common currency posted its biggest intraday decline against the dollar in more than a year on May 6 after European Central Bank President Jean-Claude Trichet said a meeting of policy makers didn’t discuss buying government bonds, an option some economists said would help to contain the region’s debt crisis.

Trichet also said the ECB’s benchmark interest rate, a record-low 1 percent, is “appropriate,” indicating he saw no immediate need to cut borrowing costs.

The euro has lost 6.5 percent this year, based on Bloomberg Correlation-Weighted Indexes. The dollar is up 5.1 percent.

Analysts reduced forecasts every month this year for where Europe’s common currency will trade by June on speculation the region’s expansion will slow as nations from Greece to Portugal are forced to curb spending. The ECB will raise its main refinancing rate from a record low 1 percent in the first quarter of 2011, according to the median estimate of economists in a Bloomberg News survey.

In the U.S., traders are still anticipating a rate increase this year after the Labor Department said May 7 that payrolls jumped 290,000 last month, the biggest increase in four years and more than the median estimate of economists surveyed by Bloomberg News.