Euro higher after German vote, EU summit ahead

NEW YORK: The euro rose against the dollar on Wednesday after Germany's Bundestag lower house of parliament approved a motion to strengthen the euro zone rescue fund through leveraging.

The vote provides Chancellor Angela Merkel with the mandate she needs to negotiate at a key European summit later in Brussels.

It also countered waning expectations of a decisive solution to the debt crisis from the summit.

European Union governments will signal readiness to back banks with guarantees to avert a credit freeze but give no overall figure for recapitalising lenders, according to a draft statement from a leaders' meeting in Brussels on Wednesday.

The dollar hit a fresh record low against the yen, keeping alive the risk of intervention by Japanese authorities, and slipped to a six-week low against the Swiss franc with hedge funds building bearish bets on the greenback.

The vote "was widely expected but in going through it gives the German chancellor the mandate to act appropriately," said John Doyle, currency strategist at Tempus Consulting in Washington.

The euro was last up 0.4 percent at $1.3958. Traders said a Middle East sovereign was buying euros, with decent sized offers placed above $1.3950 and option expiries at $1.3900 which are likely to keep the currency in a range.

Investors have been expecting the EU to adopt a plan to reduce Greece's debt burden, recapitalise European banks to help absorb bond losses, and strengthen the euro zone rescue fund, the European Financial Stability Facility (EFSF), to stave off contagion in the bond market.

But divisions remain over the extent of losses that private holders of Greek bonds would have to incur and the size of a planned bank recapitalisation, while the scope for leveraging the bailout fund is also uncertain.

"With the euro holding near the higher end of ranges, there is scope for disappointment if the EU statement falls short of expectations on details," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange. "Even if it meets expectations the euro could fall."

The incoming head of the European Central Bank, Mario Draghi, threw a lifeline by signalling the bank would go on buying troubled states' bonds to combat market turmoil.

JAPANESE INTERVENTION

The dollar hit a fresh record low against the yen of 75.709 yen on electronic trading platform EBS, keeping alive the risk of intervention by Japanese authorities. Traders cited stop loss orders below 75.70 yen and an option barrier at 79.50 yen.

The dollar was last down 0.3 percent at 75.85 yen.

Japan's central bank is likely to debate easing monetary policy further at a meeting on Thursday, sources said.

"Further modest monetary easing or unilateral intervention from Japan is unlikely to derail the yen strengthening trend on a sustained basis," said Lee Hardman, currency economist at Bank of Tokyo Mitsubishi UFJ in London.

The dollar fell against the Swiss franc, dropping to a six-week low. The euro fell to a three-week low against the Swiss franc.

Meanwhile, the Australian dollar was down 0.1 percent at US$1.0414 after Australia's underlying inflation data came in below expectations, increasing the chances of a rate cut.

Copyright Reuters, 2011