FOREX-Euro jumps on ECB lending talk, outlook shaky

* Speculation of ECB, IMF deal helps trigger stops
* Debt crisis still points to weaker single currency
* Interbank funding strains boost dollar demand

By Nia Williams
LONDON, Nov 18 (Reuters) - The euro rose against the
dollar on Friday as speculation the European Central Bank may
start lending to the International Monetary Fund to bail out
bigger euro zone economies helped lift the embattled bloc's
currency.
The euro has been under sustained pressure in recent weeks
as funding costs for major euro zone states Italy and Spain
reached danger levels and the debt crisis even threatened to
engulf France, endangering the entire currency project.
The ECB is widely seen to be the only institution with the
firepower to stop the rot and some policymakers have urged it to
take a more activist role, which top bank officials and bloc
power broker Germany have so far refused to countenance.
"There are stories circulating about the ECB going via the
IMF to lend money to countries that need help. The ECB would
have to be involved in any potential solution for it to be
credible so I would expect that to give the euro a bit of a
lift," said Tom Levinson, FX strategist at ING.
"Whether it will persist or not is highly debatable. This is
a knee-jerk euro reaction and I think it will struggle to hold
around this level."
The shared currency extended gains to rise more than 1
percent on the day to a high of $1.3615 on trading platform EBS,
although markets players said appetite to sell on upticks
remained high.
Investors closing short positions to book profit ahead of
the weekend helped boost the euro in early trade, before a
series of stop-loss orders were triggered around $1.3550,
accelerating the single currency's climb.
The euro was last up 1 percent at $1.3602, pulling
away from a five-week low of $1.3421 struck on Thursday. Traders
cited good offers in the $1.3515-20 region.
On the downside, support lies at around $1.3405, the 76.4
percent retracement of last month's rally from around $1.3145 on
Oct. 4 to a high of $1.4248 on Oct. 27.
Speculation that talks on the ECB lending to the IMF have
gained traction in the past few days. On Thursday, European
officials said there have been discussions about the central
bank possibly lending to the global lender, which would give it
enough money to bail out bigger euro zone countries.
Pressure is mounting on the European Central Bank to step up
its bond-buying programme with Italian and Spanish bond yields
close to unsustainable levels and plummeting demand from other,
real-money investors.
Bond market experts polled by Reuters saw a 50/50 chance
that the ECB will expand bond purchases to engage in outright
quantitative easing.
Prospects for the euro dimmed this week on signs the crisis
was spreading to core euro zone countries such as France, with
most investors still looking to sell into every rally.
With German bond yields no longer falling as peripheral
yields rise, analysts suggested that portfolio adjustments were
not just moving from peripheral debt to core Bunds, but that
investors were abandoning the euro zone altogether.
While highlighting the risk that the short squeeze could
push euro/dollar higher in the near term, Commerzbank
strategists said the prevailing trend was for a lower euro.
"Courageous market participants can sell the euro around
$1.3550-60, we would start shortening euro/dollar at $1.3650,"
the bank said in a note.

FUNDING STRAINS
With investors shunning euro zone assets, funding strains
were increasing for euro zone financial institutions, boding ill
for the euro and other riskier assets while offering support for
the perceived safety of the U.S. dollar.
The premium for swapping euros into dollars rose, with the
three-month cross-currency basis swap hitting
138.5 basis points on Friday, the highest since the 2008
financial crisis.
"So far this has not had a dramatic effect on the euro, but
it is likely to be behind some of the recent weakening," said
FxPro's chief economist Simon Smith.
Analysts said high funding costs were pushing banks into
shorter duration funding and could spread into spot currency
markets, weighing on the euro.
With most investors preferring safety, the yen outperformed
the dollar. The dollar dipped to a two-and-a-half week low
against the yen of 76.58 yen .
"Generally safe havens are doing very well at the moment and
once you've filled up your exposure on dollars, the yen is the
next one in line, irrespective of whether you might be worried
about intervention," said Adam Myers, senior FX strategist at
Credit Agricole in London.
This fall extended the yen's slow creep back towards levels
where Japanese authorities intervened on Oct. 31 to weaken the
currency.
The Swiss franc also outperformed the dollar, pushing
dollar/Swiss franc down 1.3 percent on the day to 0.9095 francs.
As a result of a slight pick up in risk appetite, the dollar
index was down 0.7 percent to 77.689.