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Euro falls as hopes fade for increase in rescue fund

Source: Reuters - Mon 17th Jan 2011

The euro fell broadly on Monday on fading expectations that talks on the euro zone's sovereign safety net will provide any meaningful way to help solve its debt crisis, prompting speculators to sell the currency.

Uncertainty about whether Germany would support an increase in the lending capacity of the rescue fund, known as the European Financial Stability Facility (EFSF), clouded sentiment towards the euro.

Europe responded to the debt crisis that has forced Greece and Ireland to take bailouts with a safety net fund that can borrow on the market with euro zone government guarantees of up to 440 billion euros, but analysts say a new package of anti-crisis measures is unlikely to come any time soon.

Attention is focused on the euro zone's finance ministers' meeting on Monday, where an increase in the effective lending capacity of the rescue fund is expected to dominate discussion.

Senior European sources told Reuters the sense of urgency in Berlin for boosting the fund had diminished after successful bond auctions last week in Spain and Portugal, the two countries seen most at risk of a bailout following rescues of Greece and Ireland last year.

Instead Germany is pushing for broader anti-crisis measures to be agreed at a summit of European Union leaders in March.

"It's becoming increasingly apparent that Germany doesn't want an increase in the rescue fund and that's weighing on euro sentiment today because there were positive expectations building last week," said Manuel Oliveri, currency strategist at UBS in Zurich.

"We believe the euro is a sell on rallies because investors are not minded to buy euro denominated assets while structural problems in the euro zone persist," he added.

The euro traded at $1.3283 -down around 0.7 % on the day after failing to sustain a break above its 100-day moving average at $1.3416 last week.

It was off a one-month high of $1.3458 hit as speculators went long after solid debt auctions from Spain and Portugal, hawkish comments on inflation from European Central Bank President Jean-Claude Trichet and hopes that euro zone policy makers may expand their rescue funds.

Traders said euro-selling by Japanese exporters was a factor weighing on the single European currency, which fell 0.7 % to 110.16 yen, down from Friday's one-month high of 110.99 yen.

Market players want to see enough common ground among the euro zone's finance ministers to suggest that some kind of agreement is possible in coming months, said Robert Ryan, FX strategist at BNP Paribas in Singapore.

"Unfortunately, what we got out of Germany over the weekend suggests that it's going to be very difficult. It looks like the politics in Germany are going to limit (German Chancellor Angela) Merkel's ability to enlarge the fund significantly," Ryan said.

"I don't expect any boost to the euro today from the meetings, and the best I think we can hope for is no negative comments," Ryan added.


One supporting factor for the currency is its increasing yield advantage over the dollar after two-year German short-term bond yields jumped last week following Trichet's comments on inflation.

That helped to push up the gap between two-year German and U.S. yields to the highest level since late November, when the euro was at around $1.37.

But the euro fell broadly as talks on the bailout fund dominated traders thoughts. It slipped around 0.4 percent versus the Swiss franc and sterling.

The dollar was fetching 82.90 yen, close to flat on the day from late U.S. trade on Friday and within its well-worn range in the past weeks. Traders said a U.S. public holiday may serve to limit volatility on the day.

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