Euro Strengthens After Germany’s Merkel Agrees to a Greek Debt Compromise

The euro gained versus the dollar by the most in two weeks after German Chancellor Angela Merkel agreed to compromise and work with the European Central Bank on a debt plan for Greece.

The shared currency strengthened against a majority of its 16 most-traded peers after Merkel retreated from German demands that bondholders be forced to shoulder a “substantial” share of a Greek rescue, easing concern the region’s sovereign debt problems will worsen. The euro pared its gains after Moody’s Investors Service said Italy’s bond rating may be cut. Currencies link to risk advanced as stocks gained, while the dollar dropped on concern the economic recovery is faltering.

“The latest events seem to have eased some of the immediate market stresses concerning Greece and the periphery,” said Robert Lynch, head of currency strategy for HSBC Holdings Plc in New York. “Not only did it relieve downward pressure on the euro, but it’s also allowing some semblance of increased risk appetite back into the market.”

The euro rose 0.7 percent to $1.4306 at 5 p.m. in New York, after weakening to $1.4128. It appreciated as much as 1 percent, the biggest intraday jump since June 3. Today’s gain pared the euro’s second-straight weekly decline versus the dollar to 0.3 percent. The shared currency also reversed an earlier 0.7 percent drop against the yen to end the day little changed at 114.52. The dollar lost 0.7 percent to 80.05 yen.

2011 Gain

The 17-nation currency has gained 2.5 percent this year against nine other developed-nation currencies, according to Bloomberg Correlation-Weighted Currency Indexes. The dollar has declined 4.8 percent, while the yen has lost 3.4 percent.

Currencies of commodity-exporting countries rose as stocks advanced, boosting appetite for higher-yielding assets. The MSCI World (MXWO) Index of equities rose 0.6 percent.

Australia’s dollar erased earlier losses against its U.S. counterpart, adding 0.6 percent to $1.0623. South Africa’s rand led gains against the dollar among the major currencies, strengthening 1.3 percent to 6.7619 after two days of declines.

The euro-area’s currency fell earlier on concern a potential Greek debt default may spread to other indebted nations in the 17-member bloc. The euro reversed losses after French President Nicolas Sarkozy said a “breakthrough” had been made on the Greek debt crisis, following a meeting with Merkel, who said she’ll work with the European Central Bank to avoid disrupting markets.

Vienna Plan

“The aim is involvement of the private sector on a voluntary basis, and for that the Vienna Initiative, as it’s called, is a good basis,” Merkel said. “I think we can achieve something on this basis.” A rollover involves reinvesting the proceeds from maturing bonds in new securities.

Adopting the Vienna plan, used during the financial crisis of 2009 for eastern European units of banks to maintain their exposure, would involve encouraging creditors to roll over expiring bonds, buying time for Greece until its austerity program shows results or until a permanent rescue fund kicks in from mid-2013.

Greek bonds rallied and European stocks reversed losses as attention shifted to Athens, where Prime Minister George Papandreou overhauled his Cabinet as he struggles to gain parliamentary approval for a 78 billion euro ($111.5 billion) five-year package of budget cuts and asset sales by July.

Progress Report

“If Sarkozy and Merkel are indicating that there is progress in Europe, then you know that there is progress and that’s what the market wanted to see,” said David Watt, senior currency strategist at Royal Bank of Canada’s RBC Capital unit in Toronto.

The cost of insuring Greek debt still headed for a record weekly jump. Credit-default swaps on Greece were at 1,956 basis points, up from 1,563 last week, according to CMA. The contracts went as high as 2,237 basis points yesterday.

Italy’s Aa2 local and foreign currency government bond ratings may be cut by Moody’s, the company said.

“With the focus squarely on the euro zone, Italy being placed on review by Moody’s does highlight the idea that there are a number of issues affecting Europe,” said Omer Esiner, chief market analyst in Washington at Commonwealth Foreign Exchange Inc., a currency brokerage. “There are a number of headwinds to Europe’s recovery and even some of the core euro- zone economies are facing serious challenges, including Italy.”

Economic Indicators

The dollar remained lower after a report showed U.S. consumer sentiment was lower than forecast in June, while an index of leading economic indicators rose in May.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment decreased to 71.8 from 74.3 in May. Economists forecast a reading of 74, according to the median estimate in a Bloomberg News survey.

The Conference Board’s gauge of the outlook for the next three to six months rose 0.8 percent after a revised 0.4 percent decline in April, the New York-based group said today. Economists forecast a 0.3 percent gain, according to the median estimate in a Bloomberg News survey.

“U.S. consumer confidence is concerning and will be concerning for the Federal Reserve next week,” said Camilla Sutton, head of currency strategy at Bank of Nova Scotia in Toronto. “The Fed next week will increasingly become a focus point.”

The Dollar Index, which measures the greenback against the currencies of its six major trade partners, dropped 1 percent to 74.993. The Fed’s policy-making Federal Open Market Committee will meet June 21-22.

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Garth Theunissen in London gtheunissen@bloomberg.net

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

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