Euro Rises Most in 3 Weeks as European Leaders Guarantee Banks

By Stanley White and Candice Zachariahs

Oct. 13 (Bloomberg) -- The euro rose the most in three weeks against the dollar and the yen after European leaders agreed to guarantee bank borrowing and prevent big lenders from going under.

The currency advanced as leaders of the 15 countries using the euro pledged to guarantee new bank debt until the end of 2009, let governments to shore up banks by buying preferred shares and announced a commitment to recapitalize any ``systemically'' critical banks in distress.

``We are looking at the ladder to recovery,'' said Alex Sinton, a senior currency dealer at ANZ National Bank Ltd. in Auckland. ``The market believes that come Monday open European time there will be something on the table that is supportive for the euro.''

The euro rose 1.6 percent, the most since Sept. 22, to $1.3618 at 7:53 a.m. in Tokyo, from $1.3408 late in New York on Oct. 10. It advanced 1.6 percent, the most since Sept. 19, to 137.08 yen, from 134.96 at the end of last week. The dollar was little changed at 100.72 yen.

The Australian and New Zealand dollars rose as their governments pledged to guarantee bank deposits. The Aussie, as Australia's currency is known, jumped 5.7 percent to 67.99 U.S. cents, while the New Zealand dollar gained 2.8 percent to 61.12 U.S. cents.


Collateral Rules

The euro gained for the first day in three against the dollar as European Central Bank President Jean-Claude Trichet said the ECB will examine ways to widen its collateral rules after governments asked it to set up a facility to buy commercial paper.

The euro fell 15 percent from a record $1.60 in July through last week as leaders of the nations sharing the currency struggled to agree on plans to rescue financial institutions from the seizure in credit markets that forced Paris- and Brussels-based Dexia SA and Milan-based UniCredit SpA to raise capital because of losses.

``We need concrete measures, we need unity, which is what we achieved today,'' Nicolas Sarkozy told a press conference at the Elysee Palace in Paris yesterday at a summit with European leaders to discuss a rescue package for banks. ``None of our countries acting alone could end this crisis.''

Growth Forecast

The economy of the euro region, where the benchmark interest rate is 3.75 percent, will expand 1.35 percent this year and 1 percent in 2009, according to the median of 32 forecasts compiled by Bloomberg. Growth in the U.S., whose key rate is 1.5 percent, will be 1.6 percent this year and 1.2 percent in 2009, a separate survey of 75 economists showed.

Futures traders decreased their bets that the euro will decline against the U.S. dollar, figures from the Washington- based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 18,662 on Oct. 7, compared with net shorts of 28,932 a week earlier.

Treasury Secretary Henry Paulson said Oct. 10 that the government will buy equity ``as soon as we can'' in banks and other financial institutions to weather the worst credit crisis in seven decades..

The Treasury wouldn't be involved in bank management under the equity purchase program, Paulson said in a press conference after a Group of Seven nations meeting in Washington on Oct. 10. Acquisitions would take place alongside Treasury's coming program of buying mortgage assets, he said.

Finance ministers and central bankers from G-7 countries said they would take ``all necessary steps'' to repair credit markets in a statement after their meeting.

Knee-Jerk Reaction

The Australian dollar was the biggest gainer among the 16 most-active currencies trading against the U.S. dollar after Prime Minister Kevin Rudd said Oct. 12 his government will guarantee all deposits with financial institutions for the next three years to bolster confidence in the banking system. The government will also guarantee all ``term wholesale funding'' by Australian banks operating in international credit markets.

``This is the knee-jerk reaction,'' said Danica Hampton, a currency strategist at Bank of New Zealand Ltd. in Wellington. ``For it to continue we need to see evidence that financial markets are freeing up and stabilizing.''

To contact the reporter on this story: Stanley White in Tokyo at swhite28@bloomberg.netCandice Zachariahs in Sydney at czachariahs2@bloomberg.net