Euro Rises on Reports Europe Rescue Fund to Be Boosted; Dollar, Yen Fall

Oct 19, 2011 (Bloomberg) -- The euro erased its gain versus the dollar and yen as French and German leaders convened to narrow divisions before a European summit this weekend on the region’s sovereign debt crisis.

The dollar rallied against most of its major counterparts, including the Brazilian real and South African rand, on demand for a refuge. A Franco-German split on the role of the European Central Bank in leveraging the euro bailout fund emerged at an event in Frankfurt to mark the conclusion of Jean-Claude Trichet’s term as ECB president. South Korea’s won rose versus the dollar after Japan and South Korea agreed to increase a currency swap accord to protect from funding shocks related to European debt turmoil.

"People are concerned about the meeting overall,” said Fabian Eliasson, head of U.S. currency sales at Mizuho Financial Group Inc. in New York. “There’s quite a lot of expectations going in.”

The euro was little changed at $1.3760 at 5 p.m. in New York after rising 0.9 percent earlier today. Europe’s currency traded at 105.69 yen after increasing 0.8 percent earlier to 106.54. The dollar was little changed at 76.81 yen.

French President Nicolas Sarkozy left Paris as French media reported his wife, Carla Bruni-Sarkozy, was close to giving birth for a meeting with German Chancellor Angela Merkel, Trichet and International Monetary Fund Managing Director Christine Lagarde in Frankfurt.

Merkel’s Expectations

While Merkel sought this week to lower expectations that the crisis-fighting effort would climax at the Oct. 23 summit in Brussels, Group of 20 finance chiefs last week set the meeting as a deadline for action. Failure risks a global economic slump, they said.

"Investors continue to give leaders the benefit of the doubt that something constructive can emerge this weekend,” said Joe Manimbo, a market analyst in Washington at Travelex Global Business Payments, a currency-exchange network.

Steffen Seibert, German Chancellor Angela Merkel’s chief spokesman, declined in an interview to comment on a report in the Guardian that Germany and France have agreed to increase the 440-billion euro ($606 billion) European Financial Stability Facility, the region’s rescue fund, to 2 trillion euros.

Greek Prime Minister George Papandreou won a preliminary vote in parliament on a new austerity bill in Athens, bolstering his chances of securing further international aid for the country. Workers including bank employees and taxi drivers began a two-day strike.

Dollar Index

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners led by the euro, fell almost 0.1 percent to 77.101, paring its drop on revived demand for a refuge.

South Korea’s won advanced to a four-week high after President Lee Myung Bak and Japanese Prime Minister Yoshihiko Noda agreed to increase a currency-swap accord by more than fivefold to $70 billion.

"The move strengthens our positive relative value view towards the Korean won against most other regional currencies and should also be supportive of Korean assets in general,” Ilan Solot, an emerging-markets strategist at Brown Brothers Harriman & Co. in London, wrote in a note to clients.

The won climbed 1.2 percent to 1,132.30 per dollar after touching 1,128.53, the strongest level since Sept. 19.

Drop in Stocks

The Standard & Poor’s 500 Index dropped 1.3 percent on the split between Germany and France. Crude oil for November delivery tumbled 2.6 percent to $86.07 a barrel.

Brazil’s real decreased 1.1 percent to 1.7740 against the dollar and South Africa’s rand slid 0.9 percent to 8.0420 on reduced demand for higher-yielding assets.

Norway’s krone was little changed at 5.6181 per dollar after the central bank signaled it won’t raise borrowing costs until the second half of next year on concern a slowing global economy will hurt exports and sap growth. The benchmark interest rate was held at 2.25 percent.

The euro has declined 3.8 percent against the currencies of nine developed-nation counterparts in the past year, according to Bloomberg Correlation-Weighted Indexes. The yen has risen 3.9 percent, while the dollar has dropped 2.1 percent.