Monday, 5 December 2011

Euro Rises Versus Major Peers Before Europe Summit, on IMF Plan

Dec. 5 (Bloomberg) -- The euro gained against most major peers as Italy advanced a plan to cut its deficit before a European summit on the region's sovereign-debt crisis.

The 17-nation currency rose versus the dollar after two people familiar with the negotiations said a proposal to channel European Central Bank loans through the International Monetary Fund may deliver as much as 200 billion euros ($268.4 billion) to fight the crisis. The greenback held a two-week climb against the yen after a Dec. 2 report showed the U.S. jobless rate slid to the lowest since March 2009. Malaysia's ringgit dropped from a three-week high.

"The ECB is prepared to do more as long as politicians get their fiscal house in order, so everything points in the direction of something big coming out of this week's meeting," said Khoon Goh, head of market economics and strategy at ANZ National Bank Ltd. in Wellington. "In the early part of this week we will continue to see risk appetite improve, which should boost the euro."

The euro rose 0.2 percent to $1.3421 at 6:41 a.m. in London from $1.3391 on Dec. 2, when it completed a 1.2 percent weekly advance. It gained 0.2 percent to 104.65 yen. The dollar traded at 77.97 yen from 77.99 at the end of last week.

German Chancellor Angela Merkel is scheduled to meet French President Nicolas Sarkozy to advance a plan for stricter enforcement of the region's deficit rules. European Union leaders will hold a summit in Brussels this week.

Italian Prime Minister Mario Monti announced 30 billion euros of austerity and growth measures yesterday. The premier will present the package, which includes a tax on luxury goods, resurrects a property levy on first homes, and forces many workers to delay retirement, to both houses of parliament today.

IMF Proposal

At a Nov. 29 meeting attended by ECB President Mario Draghi, euro-area finance ministers gave the go-ahead for work on a plan to recycle national central bank funds through the IMF, said people who declined to be named because the talks are at an early stage. The funds could be used to underwrite precautionary lending programs for Italy or Spain, the two countries judged to be the most vulnerable now, the people said.

The ECB will cut borrowing costs to 1 percent from 1.25 percent when it meets Dec. 8, according to the median estimate of 56 economists surveyed by Bloomberg News.

ECB 'Reward'

A rate cut "would likely spark a rally in the euro first as investors 'reward' the central bank for taking a proactive stance," Mansoor Mohi-uddin, Singapore-based head of foreign exchange strategy at UBS AG, wrote in a Dec. 3 e-mailed note.

The currency will then decline as investors weigh further ECB action as the euro-area economy deteriorates, he wrote. UBS forecasts the common currency will drop toward $1.20 next year.

A second estimate of the euro-zone's gross domestic product will show the economy expanded 0.2 percent in the third quarter, according to the median forecast of economists in a Bloomberg survey before the report tomorrow. That's the same pace of growth as in the previous three months.

Growth in factory orders in Germany, Europe's biggest economy, slowed to 1.9 percent in October from a year earlier, compared with a 2.4 percent increase in the previous month, a separate survey showed before the data is released tomorrow.

"It looks as though there's a material chance of a recession in Europe," said Michael Turner, a fixed-income and currency strategist at Royal Bank of Canada in Sydney. "In light of looser monetary policy, a pretty weak growth outlook next year and some particularly tight fiscal policy, the decline in euro has been pretty consistent."

Euro Shorts

Futures traders increased bets the shared currency will decline against the dollar, figures from the Commodity Futures Trading Commission show. The difference in the number of wagers on a decline in the euro compared with those on a gain -- so- called net shorts -- was 104,302 on Nov. 29, compared with net shorts of 85,068 a week earlier.

The euro is "a much less attractive reserve story," RBC's Turner said. "It's hard to see the demand for dollars dropping off over the next year."

The U.S. unemployment rate declined to 8.6 percent in November from 9 percent in October, data showed last week. The Institute for Supply Management's non-manufacturing index probably rose to 53.8 last month from 52.9 in October, according to the median forecast of economists surveyed by Bloomberg ahead of the Tempe, Arizona based-group's data due today.

The U.S. currency gained 0.3 percent against the yen last week after a 1.1 percent advance in the five days to Nov. 25.

The Malaysian ringgit declined against the dollar before a report that economists said may indicate industrial production climbed 1.5 percent in October from a year earlier, after a 2.5 percent gain in September. The government data is due for release on Dec. 8.

The ringgit retreated 0.6 percent to 3.1390 per dollar. The currency reached 3.1155 on Dec. 2, the most since Nov. 9.

--Editor: Rocky Swift

To contact the reporters on this story: Candice Zachariahs in Sydney at; Kristine Aquino in Singapore at

To contact the editor responsible for this story: Rocky Swift at