Euro Strengthens on Speculation Greece Will Scrap Bailout-Referendum Plan

The euro rose for a second day against the dollar on speculation Greek Prime Minister George Papandreou will withdraw his proposal for a referendum on the nation’s bailout, easing concern voters will reject the plan.

The 17-nation currency advanced versus the yen before Group of 20 leaders discuss the region’s debt crisis at a summit today and Mario Draghi addresses his first policy meeting as European Central Bank President. The dollar and yen weakened as European stocks gained, damping demand for the relative safety of the U.S. and Japanese currencies. The ECB will keep its benchmark interest rate at 1.5 percent today, according to economists surveyed by Bloomberg News.

“The bounce in the euro today may possibly be related to signs of disagreement amongst Greek politicians over whether they will vote in favor of the government,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “If the government were to fall, that could be perceived at least temporarily as euro-positive as it could reduce the risk of the referendum taking place.”

The euro appreciated 0.5 percent to $1.3817 at 12:12 p.m. London time after falling as much as 0.7 percent. It dropped to $1.3609 on Nov. 1, the weakest level since Oct. 12. The currency strengthened 0.5 percent to 107.83 yen. The dollar was little changed at 78.02 yen.

Led by Germany and France, European leaders yesterday cut off financial aid for Greece until the planned referendum in December determines whether it deserves a fresh batch of loans needed to stave off default.

‘Single Cent’

“The referendum will revolve around nothing less than the question: does Greece want to stay in the euro, yes or no?” German Chancellor Angela Merkel told reporters after crisis talks hours before the G-20 summit in Cannes, France. French President Nicolas Sarkozy said Papandreou’s government won’t get a “single cent” of assistance if voters reject the plan.

Greek Finance Minister Evangelos Venizelos said the bailout should be implemented without delay and his nation’s membership in the euro region cannot depend on a referendum. More than seven in 10 voters said they favored Greece remaining in the euro system, according to a poll last week of 1,009 people published in To Vima newspaper.

Losing Support

“Markets rallied in the late London morning on speculation that Papandreou is losing further support in the government for the referendum which would cause him to lose the elections on Friday or even resign,” Marc Chandler, chief currency strategist at Brown Brothers Harriman & Co. in New York, wrote in a note to clients. “A ‘no’ vote of confidence would likely dash chances of a December referendum, even thought it would leave Greece temporarily without a government.”

The Stoxx Europe 600 Index of shares gained for a second day, rising 1.5 percent. Standard & Poor’s 500 Index futures expiring in December rose 0.6 percent.

Draghi, who chairs his inaugural policy meeting in Frankfurt today, will resist pressure to increase the central bank’s commitment to buying the bonds of distressed euro-area states, economists surveyed by Bloomberg said. The ECB announces today’s rate decision at 1:45 p.m. and Draghi holds a press conference 45 minutes later.

‘Degree of Uncertainty’

“Given that it’s Draghi’s first meeting and there were no clear signs of a rate cut at the last meeting, there’s a degree of uncertainty of whether that will happen as soon as today,” Bank of Tokyo-Mitsubishi’s Hardman said. “At the moment, the euro’s direction is largely dictated by developments in Greece.”

The dollar dropped against 14 of its 16 major counterparts, and the yen declined versus 13, as stock gains spurred demand for higher-yielding assets.

The greenback also weakened after Federal Reserve Chairman Ben S. Bernanke said yesterday the prospect of additional stimulus “remains on the table,” boosting speculation the bank is heading toward a third round of asset purchases, or quantitative easing.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the U.S. currency against those of six trading partners, dropped 0.4 percent to 76.743.

The U.S. currency has dropped 4.5 percent over the past month, according to Bloomberg Correlation-Weighted Indexes which track the foreign-exchange of 10 developed nations. The yen has weakened 7.9 percent and the euro has risen 1.1 percent.

To contact the reporter on this story: Keith Jenkins in London at kjenkins3@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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