Euro Weakens After ECB, EU Leaders Fail to Boost Confidence in Debt Plan

By Allison Bennett and Catarina Saraiva - Dec 10, 2011 12:00 PM GMT+0700

The euro fell against the majority of its most-traded counterparts after a European Union agreement for tighter fiscal controls failed to convince investors the region’s two-year financial crisis is closer to a resolution.

The 17-nation currency weakened for the fifth week in the past six against the dollar on speculation leaders would struggle to institute tougher anti-deficit rules and as European Central Bank President Mario Draghi damped speculation the central bank to step up its bond-buying. The pound was one of the best performers this week as U.K. Prime Minister David Cameron said he would not sacrifice sovereignty to save the euro. The Dollar Index fell for a second week amid better-than- forecast economic data before the Federal Reserve meets Dec. 13.

“The ECB and Draghi were not inclined to really participate more aggressively in sovereign bond markets,” Jens Nordvig, a managing director of currency research in New York at Nomura Holdings Inc., said yesterday. “The key thing for the market is whether this is something that’s going to trigger more aggressive balance sheet use by the ECB. If we don’t have the ECB stepping in, it’s hard for the market to stabilize.”

The euro fell 0.1 percent to $1.3386 from $1.3391 on Dec. 2, after touching a one-week low of $1.3282 yesterday. The shared currency declined 0.5 percent to 103.89 yen and the Japanese currency gained 0.4 percent to 77.65 per dollar.

Bank Funding

The cost for European banks to fund in dollars reached 1.22 percentage points below the euro interbank offered rate, the most in a week, after Cameron said there was “fundamental disagreement” in European Union talks in Brussels that ended yesterday and rejected signing a “fiscal pact.” Finland also threatened to withdraw from the permanent bailout fund if changes to decision making are introduced.

“There is nothing in interbank-funding market that shows marked improvement in lending environment,” Mark McCormick, a New York-based currency strategist at Brown Brothers Harriman & Co said yesterday. “We still think that with any euro rally on any event news you want to sell on those moves as it’s not sustainable and this isn’t a game changer.”

IntercontinentalExchange Inc.’s Dollar Index (DXY) dropped four times in five days as signs the world’s biggest economy will avoid a recession reduced investor appetite for safer investments. The gauge, which Intercontinental Inc. uses to measure the greenback against six currencies fell 0.1 percent to 78.593.

Consumer Mood

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment rose to 67.7 this month from 64.1 at the end of last month. The Labor Department reported initial jobless claims fell to the lowest in nine months.

Sterling rose 0.5 percent to $1.5671 and gained 0.1 percent to 85.43 pence per euro as Britain will stay outside of the European Union budget agreement.

Bank of England policy makers kept the benchmark interest rate at a record low 0.5 percent on Dec. 8 and their asset- buying target at 275 billion pounds ($431 billion). The central bank extended its bond-purchase program in October to help bolster the flagging economy.

Norway’s krone was the best performer against the dollar during the week, advancing 0.8 percent to 5.7461.

The U.S. currency has rallied 0.5 percent in a past month against nine developed-nation counterparts tracked by the Bloomberg Correlation-Weighted Currency Indexes. The euro fell 0.8 percent and the Japanese currency was 0.8 percent stronger.

ECB Moves

The ECB cut its benchmark interest rate by a quarter- percentage point to 1 percent on Dec. 8, matching a record low, as forecast by 55 of 58 economists in a Bloomberg News survey.

Draghi said during a press conference in Frankfurt that he was “kind of surprised by the implicit meaning” that was given to his comments last week when he said the ECB could follow faster fiscal union with “other elements.”

“So the market misinterpreted the fiscal compact argument that Draghi used at the European Parliament,” Jeremy Stretch, executive director of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London said Dec. 8. The focus is back on Europe’s two bailouts funds, the European Financial Stability Facility and the European Stability Mechanism, “although as we know they have limited, inadequate firepower.”

Euro-area governments have to repay more than 1.1 trillion euros ($1.5 trillion) of long- and short-term debt in 2012, with about 519 billion euros of Italian, French and German debt maturing in the first half alone, data compiled by Bloomberg show. The ECB has bought a total of 207 billion euros of sovereign bonds during the region’s crisis in an effort to stem surges in bond yields.

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 95,814 on Dec. 6, compared with net shorts of 104,302 a week earlier.

The euro will weaken to $1.30 by the end of the March 2012, according to median forecast in a Bloomberg News survey of 42 economists and analysts. The shared currency will reach $1.32 by the end of next year, the survey shows.

To contact the reporters on this story: Allison Bennett in New York at abennett23@bloomberg.net; Catarina Saraiva in New York at asaraiva5@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net