Euro rallies broadly

The euro rallied broadly on Wednesday following a media report that the International Monetary Fund would increase its funding capabilities, and was also boosted by a ratings agency appearing to soften its stance regarding its outlook on Italy. The shared currency kept its distance from a 17-month low versus the dollar, but many in the market believe its gains this week are fleeting, and that the euro may be in for another beating if the bloc's debt crisis deteriorates.
The euro was last trading up 0.4 percent on the day at $1.2796. It pared gains from a session high of $1.2845, hit as a combination of the Fitch and IMF headlines prompted investors to cut back bearish bets. An analyst at Fitch said the ratings agency did not expect Italy to default. In earlier trade, the euro sold off after a senior director said a two-notch downgrade to Italy was an option.
The rating comments were rapidly followed by a Bloomberg News report that the IMF proposed increasing its lending pool by $1 trillion, which lent further momentum to the euro's rally. Reuters later reported the IMF is estimating it needs to raise up to $600 billion in new resources to lend to countries struggling with the fallout from the euro zone debt crisis.
Some market players were sceptical that the IMF would be able to deliver the amount initially reported, and cautioned risks for the euro were high as Greece starts talks with creditors over a debt deal later on Wednesday. "So many things are up in the air without any clear resolution. I struggle with the idea there's that increase in IMF funding coming even though the market has reacted on that," said Simon Derrick, head of currency research at Bank of New York Mellon.
As a result of broad gains the single currency was last up 0.5 percent against the yen at 98.31 yen, backing off an 11-year low plumbed earlier in the week, and recovered from a record trough hit against the Australian dollar. The dollar took a hit as a result of the euro's strength. Against a currency basket, the US currency fell 0.4 percent to 80.827, although it hovered in range of a 16-month high hit on Friday. It was flat against the yen to 76.82 yen. Also supporting the euro was solid demand seen at a German auction of two-year notes, while Portugal managed to sell short-dated paper without a hitch despite being downgraded to "junk" status by S&P late last week.