SYDNEY: The euro rallied to a two-week high against the dollar in Asia on Friday after euro zone officials gave their financial rescue fund sweeping new powers to solve Greece's debt troubles, easing fears the country's debt crisis would spread.
The dollar was punished across the board on the encouraging news out of Europe, which contrasted with confusion over how much progress Washington lawmakers were making to avoid default.
"It's probably not a long run solution but it provides some clarity... At the end of the day, it doesn't address key issues but it will contain contagion," said Grant Turley, strategist at ANZ, on the EU deal.
The markets cheered the package as it was far more ambitious that expected earlier this week. The euro climbed to a two-week high of $1.4438 , before steadying around $1.4412, up by 1.3 percent on the day. It is now targeting $1.4458 and $1.4493, with ANZ's Turley predicting the "relief rally" could send the euro as high as$1.46-$1.47.
The single currency also rose to an eight-day peak of 1.1766 Swiss francs.
The dollar even lost ground to the yen, a safe-haven currency that would normally be hit by a return to risk. The US currency slipped to a four-month trough of 78.21 , the lowest since joint G7 intervention in mid-March. The dollar was last at 78.45 yen.
The USD index dived 1.1 percent to 73.999, the biggest daily drop this year. Treasury market yields moved sharply higher on heavy unwinding of safe-haven strategies. The 10-year US Treasury yield was trading at 3.01 percent, up from 2.93 percent a day earlier.
European leaders have agreed to ease lending terms to Greece, Ireland and Portugal, while private investors would voluntarily swap their Greek bonds for longer maturities at lower interest rates to help Athens.
Total official financing for the second Greek assistance package will be around 109 billion euros, while the private sector would contribute a net 37 billion euros.
Slow progress on resolving Greece's debt crisis has been a major headwind for the euro.
Peripheral debt rallied as yields tumbled on short-dated Greek debt, down more than 4.5 percent in the two-year segment. The more liquid Italian and Spanish debt markets also showed substantial relief.
Risk appetite was enlivened and commodity currencies also outperformed the dollar with the kiwi bulldozing a fresh 30-year peak--its third this week--at $0.8643. The Australian dollar also leapt by almost 1 percent to $1.0843.
In the United States, media reported efforts to craft a $3 trillion deficit-reduction deal had gained major traction, but was later denied by the White House.
At key was a short-term extension of the debt ceiling with a $500 billion up-front deficit cut and a commitment to a more substantial, long-term solution to America's fiscal problems.
Copyright Reuters, 2011
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