FOREX-Euro gains on Europe optimism but risks are rampant

Mon Nov 28, 2011 2:44pm EST

Related Topics

* Euro gains ahead of Ecofin meeting, EU summit
    * IMF denies in talks with Italy on financing
    * Investors wary, focus on debt auctions

    By Julie Haviv
    NEW YORK, Nov 28 (Reuters) - The euro rose from a
seven-week low on Monday on hopes of progress on the sovereign
debt crisis, but gains are tenuous given a slew of upcoming
events could cast doubt on the likelihood of decisive action.
    Hefty debt supply from Italy and Spain, a euro zone finance
ministers meeting starting on Tuesday as well as a European
Union summit on December 9 should prove pivotal for the euro
and risk-correlated currencies.
    Earlier reports about IMF funding for Italy, since denied
by the IMF, initially encouraged investors to unwind bearish
positions in the common currency.
    Germany will propose that euro zone countries set up
national funds to house debt exceeding the EU's limit of 60
percent of gross domestic product (GDP) as part of a drive to
restore confidence in Europe's finances, Finance Minister
Wolfgang Schaeuble said.
    Officials said Germany and France were exploring radical
methods of securing deeper and more rapid fiscal integration
among euro zone countries.
    "We have had bouts of optimism several times in the past
year and they ended in tears," said Steven Englander, head of
G10 strategy at CitiFX, a division of Citigroup, in New York.
    "There has been a more active discussion about how to
handle the debt crisis than there was a month ago, but upcoming
events will be key to whether this wave of optimism is
sustainable."
    The euro was last up 0.7 percent to $1.3324, having
climbed to almost $1.3400. Steady selling had driven the
currency down 7 percent from a high on Oct. 27 to a trough on
Friday.
    Signs of life in the U.S. consumer despite poor jobs and
housing markets added to risk appetite. with U.S. retailers
racking up record sales over the Thanksgiving weekend, an
industry trade group said on Sunday..
    Nevertheless, euro negatives abound. In particular, the
fiscal integration plans seem to be focusing on AAA-rated euro
zone sovereigns, leaving Italy and Spain largely unaccounted
for. Additionally, any push for EU treaty changes needed for
the creation of broader fiscal union could face some strong
opposition by various euro zone and EU countries.
    This could mean that ECB support for weaker euro zone bond
markets may not be as forthcoming as investors hope.FOCUS ON AUCTIONS
    Analysts point to the risk from debt auctions this week
that follow high-profile disappointments at some recent sales.
    Belgium had to pay a much higher price to issue 10-year
debt on Tuesday.Sales to follow by Italy,
France and Spain all have the potential to highlight the
severity of the funding problems facing many euro zone
countries.
    "The euro looks very vulnerable in  a week where there is
an awful amount of (debt) supply from euro zone countries.
Trade will be directional and will be based on how the response
is to these auctions," said Jane Foley, senior currency analyst
at Rabobank in London.
    Italian 10-year spreads over German bunds narrowed on
Monday with dealers citing support from the European Central
Bank.
    Against the yen, the dollar rose 0.3 percent to 78.98 yen while it lost 0.9 percent against the Swiss franc to
trade at 0.9224 francs .
    Commodity currencies outperformed the euro, with the
Australian dollar jumping more than 2 percent on the day to
$0.9916 , having hit a one-week high. The New Zealand
dollar was also up more than 2 percent at $0.7545.
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