Euro up on talk of EU package, trade jittery

SYDNEY Sun May 9, 2010 7:58pm EDT

SYDNEY (Reuters) - The euro was struggling to hold early gains on Monday having initially rallied on reports EU ministers were discussing a 600 billion euro plan to prevent Greece's debt crisis spreading to other countries.

The euro was up at $1.2856, from $1.2714 late in New York on Friday, but had been quoted as high as $1.2948 at one point. Details of the EU plan were sketchy and traders were wary of taking the euro too high given past failures to get a concrete deal done.

Traders said there has been talk that the European Central Bank could set up a forex swap facility with other central banks or even buying government bonds, though they added any bounce could easily wane if nothing concrete is decided soon.

"The initial reaction has been positive, the initial details have been encouraging, but market's sentiment still a bit fragile as we're waiting for a some more detail," said Bank of NZ currency strategist Mike Jones.

"I think euro will consolidate until we get some further details, people are a bit wary they might be disappointed as in the past."

The euro also rose to 118.28 yen, from Friday's late level of 116.07, while the U.S. dollar firmed to 92.10 yen, from 91.56 yen. The dollar index .DXY was down 0.52 percent at 84.01.

High yielding currencies such as the Australian and New Zealand dollars also firmed as investors showed more appetite for risk, while U.S. stock futures jumped and oil regained some ground to $76.26.

EU sources said Germany, which faces public opposition to bailouts, was resisting any deal that put no limit on the potential financial assistance for countries such as Portugal, Spain or Ireland and wanted the IMF involved.

But a compromise was being discussed that included loan guarantees by euro zone countries worth 440 billion euros, a stabilisation fund worth 60 billion euros and a 100 billion euro top-up of International Monetary Fund loans. EU sources also said the Governors of ECB met on Sunday to discuss the crisis.

Over the weekend, the International Monetary Fund approved a 30 billion euro package of aid for Greece, with the first payment available as soon as the middle of this week.

Fears of a meltdown in the euro zone had been driving investors to the safety of the Japanese yen and the U.S. dollar, considered safe-haven investments when risk aversion spikes.

Growth-leveraged currencies regained some ground, having been hit hard last week as investors feared weakness in markets could drag on world growth.

The Australian dollar firmed to $0.8940, from a low of $0.8862 late in New York on Friday, while the Kiwi was at $0.7135, from $0.7130.

The Group of 20 economies will also hold a teleconference from 7:00 am on Monday (2200 GMT on Sunday) between deputy finance ministers to discuss issues related to the Greek fiscal crisis, a South Korean official said on Monday.

Officials were not likely to adopt any fresh action to take at the teleconference but would discuss their views on the current situation.

Sterling regained ground, bouncing from one-year lows of $1.4475 on Friday, helped by the euro's recovery. It rose to as high as $1.4865 in early trade, but pared some of those gains to $1.4807 as political uncertainty weighed.

Britain's Conservatives and Liberal Democrats will hold further talks on Monday to try and stitch together a deal to govern with markets anxious about how the new government will go about addressing the precarious state of public finances.

"The longer political leaders dilly dally about the leadership, then sterling will stay under pressure," said David Scutt, forex trader at Arab Australia Bank in Sydney

"Lets see if they learn from the mistakes made by the continental leaders."

(Additional reporting by Wayne Cole and Anirban Nag)

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