Euro Weakens as European Officials Split Over Fund Increase; Dollar Climbs

The euro fell against most of its major counterparts as European officials showed divisions about how to contain the sovereign-debt crisis.

The Dollar Index rose for the first time in four days as Federal Reserve Chairman Ben S. Bernanke said another recession “doesn’t seem likely.” Belgian Finance Minister Didier Reynders said a euro-zone bailout fund might be expanded, breaking ranks with German Chancellor Angela Merkel and French President Nicolas Sarkozy. Hungary’s forint declined after a credit rating downgrade and Taiwan’s dollar rose before a report forecast to show shipments increased.

“The focus is coming back toward the euro zone,” said Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut. “People are refocusing on the fact that there is still no solution for the euro zone. Those disagreements weigh on sentiment.”

The euro weakened 1.1 percent to $1.3267 at 9:03 a.m. in New York. It rose to $1.3414 Dec. 3, the highest close since Nov. 22. The common currency slid 0.7 percent to 109.98 yen, from 110.73. It touched 111.19 yen on Dec. 2, the strongest since Nov. 29.

The 16-nation euro weakened against 12 of the world’s 16- most traded currencies monitored by Bloomberg.

Bailout Fund

Reynders, whose country holds the rotating European Union presidency until the end of this year, told reporters on Dec. 4 that a 750 billion-euro ($995 billion) bailout fund could be increased. He said European finance ministers meeting in Brussels will discuss the outlook for Portugal amid speculation it will need a bailout.

“If we decide this in the next weeks or months, why not apply it immediately to the current facility?” Reynders said.

European Central Bank council member Guy Quaden, speaking in Brussels, said he also favors increasing the fund. The meeting also comes after Luxembourg Finance Minister Jean-Claude Juncker and Italian counterpart Giulio Tremonti wrote a letter to the Financial Times newspaper calling for the introduction of a joint European government bond.

“E-Bonds” would be sold by a European Debt Agency, which could be created as early as this month and finance as much as 50 percent of the issuances by EU members to create a deep market, they said. A switch would also be offered between E- Bonds and current government bonds.

Merkel Stand

Merkel, who heads Europe’s largest economy, rejected the common bonds and reiterated in Berlin that she opposes adding to the rescue fund for indebted nations.

“I see no need to expand the fund right now,” Merkel told reporters. European treaties don’t “allow Eurobonds, as far as we’re concerned.”

The most accurate foreign-exchange strategists said the euro’s worst annual performance since 2005 will extend into next year as the region’s sovereign-debt crisis saps economic growth.

Standard Chartered Plc, the top overall forecaster in the six quarters ended Sept. 30 based on data compiled by Bloomberg, predicted the euro may weaken to less than $1.20 by mid-2011. Westpac Banking Corp., the second most accurate, is “bearish in the short term,” and No. 3 Wells Fargo & Co. cut its outlook at the end of last week.

The euro has fallen 9.3 percent this year in a measure of the currencies of 10 developed nations, according to Bloomberg Correlation-Weighted Currency Indexes. Ireland last month accepted an 85 billion-euro bailout package from the European Union and International Monetary Fund.

Ireland Votes

The Irish government will lay out details tomorrow of 6 billion euros of spending cuts and tax increases. Prime Minister Brian Cowen’s Fianna Fail party has a minority of seats in parliament and has yet to declare support for the budget.

The dollar has fallen 1.3 percent this year and the yen has advanced 12.2 percent, Bloomberg Correlation-Weighted Currency Indexes show.

The dollar rose to 82.89 yen, from 82.53 yen on Dec. 3, the lowest since Nov. 12. The Dollar Index, which tracks the U.S. currency against six trading partners including the euro and yen, gained 0.6 percent even as Bernanke said the economy is barely expanding at a sustainable pace and that it’s possible the Fed may expand bond purchases beyond the $600 billion announced last month to spur growth.

‘Not Self-Sustaining’

“We’re not very far from the level where the economy is not self-sustaining,” Bernanke said in an interview broadcast yesterday by CBS Corp.’s “60 Minutes” program. “It’s very close to the border. It takes about 2.5 percent growth just to keep unemployment stable and that’s about what we’re getting.”

Bernanke said a return to a recession “doesn’t seem likely” because sectors of the economy such as housing can’t become much more depressed.

The dollar appreciated 0.9 percent against the Swiss franc after earlier touching the lowest in more than three weeks.

Hungary’s forint fell, extending the biggest decline among emerging-market currencies this year, after Moody’s Investors Service lowered the nation’s credit rating to Baa3, its lowest investment-grade ranking.

The forint tumbled 2.5 percent to 211.33 per dollar, from 206.15. It has lost 10 percent this year.

Taiwan’s dollar rose the most against the greenback among the 16 major currencies as economists in a Bloomberg survey predict data tomorrow will show shipments gained for a 13th month in November.

Taiwan’s currency added 0.6 percent to NT$30.144.

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.