Euro Rises on Prospect ECB May Take Steps to Contain Sovereign Debt Crisis

The euro rallied versus the dollar and yen for the first time in four days as speculation increased the European Central Bank may signal tomorrow its willingness to step up efforts to curb the spread of the region’s debt crisis.

The shared currency reached the day’s high after Reuters reported the U.S. would back increasing the size of the European Union’s rescue pool through the commitment of more money from the International Monetary Fund. A U.S. official denied the report. ECB President Jean-Claude Trichet said yesterday in Brussels he didn’t believe the region’s financial stability was in question and signaled more bond purchases were possible.

“This is very beneficial for the euro,” said Jessica Hoversen, a Chicago-based analyst at the futures broker MF Global Holdings Ltd. “The selloff was broad in the euro, and you have to anticipate the fact that the ECB is going to act.”

The euro rose 1.2 percent to $1.3139 at 5 p.m. in New York, from $1.2983 yesterday, when it touched $1.2969, the lowest level since Sept. 15. It climbed as high as $1.3182. The currency dropped 6.9 percent in November, the biggest monthly loss since May.

The shared currency climbed 1.8 percent to 110.58 yen, from 108.65 yesterday. The dollar appreciated 0.6 percent to 84.19 yen, from 83.69.

Dollar Index Falls

The Dollar Index, which tracks the U.S. currency against six trading partners including the euro and yen, fell for the first time in four days, even as the Federal Reserve’s Beige Book business survey said the economy gained strength across much of the U.S. The index declined 0.6 percent to 80.685.

Stocks climbed after data showed manufacturing expanded in China, the U.S. and Europe. The MSCI World Index gained 1.9 percent and the Standard & Poor’s 500 Index advanced 2.2 percent. The Reuters-Jefferies CRB Index of raw materials surged 2.5 percent.

South Africa’s rand appreciated against most of the dollar’s 16 major counterparts as commodities gained. It climbed as much as 1.4 percent to touch 7.0008 per greenback, the strongest level in a week.

Other currencies tied to growth such as the Canadian and Australian dollars strengthened as data showed Chinese manufacturing expanded more than forecast. China’s Purchasing Managers’ Index climbed for a fourth month in November, reaching 55.2 from 54.7 in October, according to a logistics federation report. The median forecast in a Bloomberg News survey was 54.8.

Canadian, Australian Dollars

The Canadian currency jumped 0.9 percent to C$1.0170 per U.S. dollar and the Aussie rose 1 percent to 96.81 U.S. cents.

Spanish 10-year government bonds rose, snapping an 11-day decline and pushing yields down 22 basis points to 5.28 percent on speculation the ECB may move to curb debt-crisis contagion. It was the biggest drop on a closing basis since May. Portuguese two-year debt rose, sending the yield as much as 24 basis points lower to 4.59 percent.

The ECB’s Governing Council will meet tomorrow amid speculation it will again delay its exit from emergency liquidity measures. Economists forecast policy makers will keep the benchmark interest rate at 1 percent.

“I don’t believe that financial stability in the euro zone could really be called into question,” Trichet told lawmakers. The ECB’s bond program is “ongoing” and “we will see what we decide.”

Speculation the debt crisis will spread to Portugal and Spain grew after an 85 billion-euro ($112 billion) aid package led by European Union governments and the International Monetary Fund was authorized on Nov. 28 for Ireland.

Bailout Fund

In May, European officials set up a 750 billion-euro bailout fund with IMF support after Greece’s budget-deficit emergency. On the same day, the ECB took the unprecedented step of agreeing to buy government bonds to try to restore normal functioning on Europe’s bond markets.

The euro briefly extended gains after Reuters reported, citing an unnamed U.S. official, a bailout-fund expansion would be Europe’s decision. A U.S. official in Washington told Bloomberg the U.S. is not discussing extra IMF money for Europe.

“What we’re seeing is a heightened degree of volatility, pretty sharp intraday moves in both directions considering what’s been going in Europe with the ECB,” said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York.

The dollar is benefiting from Europe’s woes, while the U.S. economy is in a “gradual state of repair” and should avoid falling back into recession, said Richard Fisher, president of the Federal Reserve Bank of Dallas. He spoke to reporters today after a speech in Killeen, Texas.

Bullish on Euro

Goldman Sachs Group Inc. forecast the euro will climb to $1.50 by the end of 2011.

“Despite the improving U.S. growth picture, we continue to forecast a decline in the U.S. dollar on a broad basis, although we have tempered the path of decline somewhat on the back of our increased optimism on U.S. growth,” Goldman economists led by Dominic Wilson wrote in a report to clients today.

The dollar fell versus most major peers even as the Institute for Supply Management’s factory index showed U.S. manufacturing expanded for a 16th straight month in November.

In U.S. central bank’s Beige Book, five Fed banks said the economy grew “at a slight to modest” rate, five others reported a “somewhat stronger pace” and two said conditions were “mixed.”

European manufacturing expanded at the fastest pace in four months in November. A factory gauge of the euro area rose to 55.3 from 54.6 in October, London-based Markit Economics said.

To contact the reporters on this story: Allison Bennett in New York at abennett23@bloomberg.net; Catarina Saraiva in New York at asaraiva5@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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