NEW YORK (Reuters) - The euro rose on Monday, boosted by a $1 trillion rescue designed to stabilize it and prevent a European debt crisis from spreading, but questions about how the plan will work knocked it off the day’s high.
The money, which would be available to euro zone countries that get into financial trouble, amounts to the biggest bailout since Group of 20 leaders rolled out emergency support for the world economy following the 2008 collapse of Lehman Brothers.
The euro initially soared above $1.30, rebounding from a 14-month low near $1.25 hit last week as markets feared a debt crisis in Greece would spread to other euro zone countries, including Spain and Portugal.
But concerns lingered about the aid package, including questions about how quickly aid could be disbursed, and the currency fell back below $1.28 by late afternoon, not far from its level late Friday in New York, before the bailout was announced.
“People were heavily positioned against the euro, so we initially had a huge short-covering rally. But we’re still not sure how some of the funding will work, and I don’t think this addresses the core problem: Greece’s debt trajectory is still by any measure unsustainable,” said Win Thin, senior currency strategist at Brown Brothers Harriman.
After hitting a session high of $1.3093, the euro fell to $1.2791, up 0.3 percent on the day. Alan Ruskin, chief international strategist at RBS Securities, said he still sees the currency trading in “the low $1.20s by late summer.”
Against the yen the euro rose 2 percent to 119.20 yen after last week hitting its lowest level since 2001, while the dollar added 1.8 percent to 93.18 yen. Wall Street also rallied, and European shares rose at their fastest pace in more than 17 months.
Sterling rose 0.5 percent to $1.4872 but retreated from a session peak above $1.50 after British Prime Minister Gordon Brown said he would resign as Labour Party leader to increase the party’s chances of forming a new government with the Liberal Democrats.
Labour finished second in last week’s inconclusive UK election, and the Liberal Democrats were already in talks with the poll’s top vote-getter, the Conservatives.
The pound hit a one-year low of $1.4475 last week for fear political stalemate will hamper efforts to tackle the UK’s public deficit.
The euro is still down 10.5 percent this year, making it the worst performing major currency, and Moody’s Investors Service on Monday said it may still downgrade Portugal’s investment grade credit rating and drop Greece’s rating to junk status.
Prices of Greek and other government bonds rose on Monday as the European Central Bank began buying debt to ease borrowing costs and boost liquidity.
In the long run, though, analysts said that would increase the supply of euros and keep euro zone interest rates low. That would pressure the currency, particularly if the Fed lifts U.S. interest rates as expected later this year.
The rescue increases temporary access to funding to strapped euro zone governments but “does nothing to resolve the questions of solvency, especially in the case of Greece,” said David Gilmore, principal at Foreign Exchange Analytics in Essex, Connecticut.
As of May 4, speculators were still making record large bets against the euro, according to data from the Commodity Futures Trading Commission.<IMM/FX>.
As those bets unwind in the near term, the euro could hit $1.3490, said Ashraf Laidi, chief market strategist at CMC Markets. But he said doubts about whether Greece can implement promised budget cuts and whether Spain’s ability to roll over short-term debt suggest “a protracted retreat toward $1.23, followed by $1.17” by the third quarter.
Reporting by Steven C. Johnson and Wanfeng Zhou; Editing by Dan Grebler
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