The euro rose the most in three weeks against the dollar after
European leaders agreed to guarantee bank borrowing and prevent
failures that would further batter the credit markets.
Europe's single currency also strengthened versus the yen as leaders of
the 15 countries using the euro endorsed bailing out ``systemically''
critical banks in distress. The British pound advanced against the
dollar on speculation the government's bailout plan will avert a
banking collapse.
``The rebound in the euro, and in sterling, is a direct response to the
clarity of bailout plans in the euro zone and the U.K.,'' said Simon
Derrick, head of currency strategy in London at Bank of New York Mellon
Corp. ``In the medium-term, this means a surge in national debt which
won't bode well for these currencies. In the near-term, the plans give
investors confidence that there won't be further banking failures.''
European policy makers meeting in Paris yesterday pledged to guarantee
until the end of 2009 bank-debt issues with maturities up to five
years. Plans to recapitalize banks in the region will cost 300 billion
euros ($406 billion), according to Goldman Sachs Group Inc.
``The current financial woes will likely be gradually resolved in the
long term,'' said Mitsubishi UFJ Trust's Yamamoto. ``The euro may
strengthen.''
Losses in the dollar accelerated after the Fed said today the
European Central Bank and its counterparts will offer financial
institutions unlimited funds in the U.S. currency, providing easier
access to the U.S. currency in response to demand for dollar loans.
The ECB, the Bank of England and the Swiss National Bank will conduct
dollar auctions at maturities of seven days, 28- days and 84-days at a
fixed interest rate, the Fed said on its Website.
Gains in the euro may be limited by speculation the ECB will
lower borrowing costs to stimulate the economy, reducing the 15-nation
region's interest-rate advantage over the U.S. and Japan, according to
UBS AG.
``Over a longer-time horizon, if we avoid a meltdown in the financial
system, evolving yield differentials should be supportive of the yen
and the U.S. dollar, as European countries have further room to cut
interest rates in response to slowing global growth,'' wrote Ashley
Davies, a currency strategist in Singapore at UBS, in a research note
today.
The economy of the euro region, where the benchmark interest rate is
3.75 percent, will expand 1.35 percent this year and 1 percent in 2009,
according to the median of forecasts. Growth in the U.S., whose key
rate is 1.5 percent, will be 1.6 percent this year and 1.2 percent in
2009, a separate survey of 75 economists showed.
The yen may extend gains against the U.S. dollar as Japanese investors
start selling some of their more than $1.3 trillion in overseas assets
to bring money home because of a global slump in equities, JPMorgan
Chase & Co. said.