Bloomberg News

Euro Rises on Optimism EU May Speed Fund to Stem Debt Crisis

September 25, 2011

Sept. 26 (Bloomberg) -- The euro rose on optimism European officials may speed efforts to stem the region’s debt crisis after mounting pressure from foreign counterparts and investors at the International Monetary Fund’s annual meeting.

European governments are exploring accelerating the start of a permanent rescue fund for their economies, with senior finance officials set to examine this week the cost advantages of setting up the European Stability Mechanism, or ESM, a year earlier than its July 2013 start, according to a document prepared for the meetings and obtained by Bloomberg News.

The euro rose to $1.3545 from $1.35 on Sept. 26 in early Asia-Pacific trading, according to data compiled by Bloomberg. It gained to 103.52 from 103.40.

U.S. Treasury Secretary Timothy F. Geithner set the tone for the Sept. 24 annual meeting of the IMF in Washington by warning that failure to combat the Greek-led turmoil threatened “cascading default, bank runs and catastrophic risk.” Billionaire investor George Soros said “something needs to be done” to safeguard Europe’s banks because Greece may be unable to avoid default.

Faster ESM enactment would provide a “more effective financing structure” that cuts the extra debt of donor countries by 38.5 billion euros, according to the document obtained by Bloomberg News. “This gain is to be considered as a minimum,” it said.

Relative Strength

Asked by Bloomberg Television about bringing forward the ESM’s start date, EU Economic and Monetary Affairs Commissioner Olli Rehn said the focus for now is on upgrading the temporary fund, the 440 billion-euro European Financial Stability Facility.

For all the concern about sovereign default in Europe, the euro remains above its average since being created almost 12 years ago, a sign that foreign-exchange traders see little chance of a collapse as officials step up efforts to keep the debt crisis from expanding.

The euro strengthened 1.42 percent last week against a basket of nine developed-nation peers, the most since gaining 1.55 percent in the period ended June 3, according to Bloomberg Correlation-Weighted Currency Indexes. It has risen 2.8 percent from this month’s low on Sept. 12, the indexes show.

Trading Patterns

At last week’s close of $1.35, the currency is 12 percent stronger than its average of $1.2024 since January 1999. While strategists have cut their forecasts for appreciation, they still see it rising to $1.43 by the end of 2012, based on the median of 35 estimates in a Bloomberg survey.

The dollar and yen rallied last week after Federal Reserve policy makers said they saw “significant downside risks” to the U.S. economy and Greece struggled to avoid default, spurring demand for refuge. The dollar rose 2.2 percent to $1.35 per euro. Japan’s currency gained 0.2 percent to 76.61 yen per dollar, and advanced 2.4 percent against the shared currency to 103.40.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, touched 78.798 on Sept. 22, the highest level since Feb. 14.

Aggregate bets the dollar will strengthen against the euro, the yen, the Australian, Canadian and New Zealand dollars, the pound, the Swiss franc and the Mexican peso surged to 75,065 contracts in the week ended Sept. 20, according to Commodity Futures Trading Commission Data as compiled by Bloomberg. Foreign-exchange traders are net long the dollar for the first time since July 2010.

Price swings surged to a 16-month high with implied volatility for currencies of the Group of Seven nations reaching 15.5 last week, the highest since May 2010, a JPMorgan Chase & Co. index showed.

--Editors: Paul Cox, Robert Burgess.

To contact the reporters on this story: Robert Burgess in New York at bburgess@bloomberg.net.

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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