Bloomberg News

Euro Weakens Amid Concern Leaders May Fail in Debt Crisis Fix

December 07, 2011

Dec. 7 (Bloomberg) -- The euro declined against most of its major counterparts as concern increased that European leaders will struggle to agree to measures needed to stem the region’s debt crisis at a summit this week.

The 17-nation currency traded little changed against the dollar as three euro-area officials said that the European Central Bank may announce a range of measures tomorrow to stimulate bank lending. European leaders gather for a summit in Brussels the next two days. Australia’s dollar rose after gross domestic product grew faster than economists forecast last quarter.

“You have a lot of uncertainty in the market before the meetings,” said Fabian Eliasson, head of U.S. currency sales at Mizuho Financial Group Inc. in New York. “It really comes down to the next two days. The market has high expectations for this and if the market is disappointed you could see risk being taken off and really strong moves.”

The euro was little changed at $1.3409 at 12:34 p.m. in New York, after rising as much as 0.4 percent. It traded at 104.13 yen. The Japanese currency was little changed at 77.66 per dollar.

Bank Funding

The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 109 basis points below the euro interbank offered rate today, down from minus 119 yesterday. That’s the least since Nov. 14.

The ECB said demand for three-month dollar loans jumped to $50.7 billion today, following last week’s concerted action with five other central banks to lower interest rates on such loans. That compares with the $395 million lent in the last such offering on Nov. 9.

Europe’s banks will compete with their governments to borrow $2 trillion next year as the two groups refinance maturing bonds and bills.

The euro weakened after a German government official said the nation rejects proposals to combine current and permanent euro-area rescue funds. The government official spoke to reporters in Berlin today on condition of anonymity because the negotiations are private.

The official’s comments came after the Financial Times reported yesterday that European Union leaders may agree on a package including the existing 440 billion euro ($588 billion) bailout fund and a new 500 billion euro facility. Negotiations were started about pairing the two, according to two people familiar with the discussions, Bloomberg News reported on Oct. 20.

ECB Moves

The ECB will reduce its benchmark rate to 1 percent from 1.25 percent tomorrow, according to the median estimate of economists surveyed by Bloomberg News.

Additional options that the central bank is considering include loosening collateral criteria so that institutions have more access to cheap ECB cash and offering them longer-term loans to grease the flow of credit to the economy, said the officials, who spoke on condition of anonymity because the discussions are private. Two said an interest rate cut is likely, with only the size of the reduction to be determined for the monthly decision tomorrow.

“We could see a rate cut tomorrow, as well as a little bit of disappointment over the prospects for the EU summit,” said Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York. “While austerity and budget discipline and sanctions are worthwhile causes, you still have a debt problem.”

Euro Drops

The euro has fallen 1.2 percent in the past month, according to Bloomberg Correlation-Weighted Indexes tracking 10 developed-nation currencies. The yen has advanced 2.7 percent, the best performance, and the dollar has strengthened 2.2 percent.

The U.S. received its highest rating from international investors in more than two years on new optimism that the world’s largest economy will weather the financial crisis in Europe and avoid a recession in 2012, according to the quarterly Bloomberg Global Poll conducted Dec. 5-6 of 1,097 investors.

More than two in five of those surveyed -- 41 percent -- identify the U.S. as among the markets that will perform best over the next year. That’s up from less than one in three who felt that way in September and is the biggest percentage for the U.S. since the survey began in October 2009.

Dollar Measure

The Dollar Index, which IntercontinentalExchange Inc. uses to track the U.S. currency against those of six major trading partners, fell 0.1 percent to 78.428.

Never before has the euro influenced U.S. stocks as much as this year, a sign that American equities aren’t going anywhere until Europe’s credit crisis is solved.

The link between the Dow Jones Industrial Average and swings in the currency reached a record on Dec. 2, according to data compiled by Bloomberg. The so-called correlation coefficient showing how much two markets rise and fall in tandem hit 0.85, the highest level since the euro was founded in 1999, data on 60-day rolling averages show. A reading of 1 means assets are moving in lockstep.

The Australian dollar strengthened after the Bureau of Statistics said the economy expanded 1 percent in the three months ended Sept. 30, after growing a revised 1.4 percent in the prior quarter, the fastest pace in four years.

“The GDP data was strong and that is bullish for the Aussie,” said Thomas Harr, head of Asian currency strategy at Standard Chartered Plc in Singapore. The market may “take back some of the rate-cut expectations.”

The Aussie advanced as much as 0.5 percent to $1.0299.

--With assistance from Monami Yui in Tokyo and Paul Dobson in London. Editors: Paul Cox, Dave Liedtka

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net

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


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