Euro under pressure as Merkozy fails to agree a deal to salvage the euro

Tom Tong21/Oct/2011Currency Updates

EUR

The euro weakened versus the dollar as concern the impasse will prevent an agreement at the meetings. The franc climbed to a two-week high against the 17-nation euro. The yen and the dollar headed for weekly advance against most major counterparts as European stocks headed for a loss this week, boosting demand for the safest assets.

Negotiations on combining the European Union’s temporary and planned permanent rescue funds as of mid-2012, while scrapping a ceiling on bailout spending, accelerated this week after efforts to leverage the temporary fund ran into European Central Bank opposition and provoked the French-German clash, two people familiar with the discussions said. They declined to be identified because political leaders will have to decide. Throughout the day the currency was quick to respond to news relating to the summit of the region’s officials set to take place this Sunday. The euro was buoyed by reports that German Chancellor Angela Merkel and French leader Nicholas Sarkozy will agree on a firm plan by Wednesday.

GBP

Sterling slipped against the dollar on Thursday, tracking the euro as investors questioned how much progress would be made on resolving the euro zone debt crisis at an EU summit this weekend.

The pound was whipped around in volatile trade by moves in the single currency, which relinquished early gains when a German media report said Berlin had not ruled out postponing the meeting scheduled to begin on Friday.

German government sources later said the summit would go ahead but would not reach a deal on leveraging the euro zone rescue fund.

An unexpected increase in UK retail sales in September gave the pound only a brief lift as the data did little to change the view that the UK economy is struggling to recover.

Given the weekend’s event risk, analysts said sterling’s direction would continue to be dictated by the single currency, and that the pound could suffer more against the dollar if European leaders are seen to be unable to agree on altering the size and scope of the euro zone bailout fund.

USD

The euro see-sawed against the dollar on Thursday amid widespread concern about how European leaders will deal with the ever-growing economic crisis in the region.

The dollar index, which tracks the currency against a basket of six major currencies, dropped from 77.152 on Wednesday to 76.982 last night with the Greenback showing particularly strong performance against the Yen.

Elsewhere Federal Reserve Governor Daniel Tarullo called for resumption of large-scale purchases of mortgage bonds. This may boost chances that the central bank will start a third round of asset buying aimed at reviving U.S. growth.

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Written by Tom Tong

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