Euro Gains Before Leaders’ Debt Crisis Summit, ECB Interest Rate Statement

The euro rose against the dollar, after erasing earlier losses, as optimism increased that European leaders will be able to agree on measures to help solve the region’s debt crisis.

The 17-nation currency dropped earlier against most of its counterparts after a German government official said the nation rejects proposals to combine current and permanent euro-area rescue funds. The European Central Bank is forecast to announce an interest-rate cut tomorrow and European leaders gather for a summit in Brussels during the next two days. Australia’s dollar rose after gross domestic product grew last quarter faster than economists forecast.

“Anything that will help to ensure a more stable euro zone in the long term will be supportive of the euro in the short term,” said Ravi Bharadwaj, a market analyst in Washington at Travelex Global Business Payments, a currency-exchange network. “When so many market participants are clamoring for information, any sort of rumor can impart substantial changes in asset prices.”

The euro rose 0.1 percent to $1.3412 at 5 p.m. in New York after falling as much as 0.4 percent. The 17-nation currency was little changed at 104.18 yen. The Japanese currency gained 0.1 percent to 77.68 per dollar.

EU Warning

The European Union had its AAA long-term rating put on “credit watch negative” by Standard & Poor’s, which is also reviewing ratings for BNP Paribas SA, Commerzbank AG and Deutsche Bank AG. The ratings company put 15 euro countries on similar watch for downgrade earlier this week, saying it would conclude its review following the leaders’ summit.

The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 109 basis points below the euro interbank offered rate today, down from minus 119 yesterday. That’s the least since Nov. 14.

The ECB said demand for three-month dollar loans jumped to $50.7 billion today, following last week’s concerted action with five other central banks to lower interest rates on such loans. That compares with the $395 million lent in the last such offering on Nov. 9.

Meeting Advance

“You really have a lot of uncertainty in the market before the meetings that are coming up,” said Fabian Eliasson, head of U.S. currency sales at Mizuho Financial Group Inc. in New York. “I don’t think anyone wants to take up positions going into that. People want to stay neutral.”

Futures traders had increased bets that the euro will fall against the dollar to 104,302 contracts in the week ended Nov. 29, the most since June 2010. A short is a bet the price of an asset will fall.

The Australian dollar strengthened after the Bureau of Statistics said the economy expanded 1 percent in the three months ended Sept. 30, after growing a revised 1.4 percent in the prior quarter, the fastest pace in four years.

“The GDP data was strong and that is bullish for the Aussie,” said Thomas Harr, head of Asian currency strategy at Standard Chartered Plc in Singapore. The market may “take back some of the rate-cut expectations.”

The Aussie advanced 0.5 percent to $1.0294.

The euro weakened after a German government official said the nation rejects proposals to combine current and permanent euro-area rescue funds. The government official spoke to reporters in Berlin today on condition of anonymity because the negotiations are private.

Euro Funding

The official’s comments came after the Financial Times reported yesterday that European Union leaders may agree on a package including the existing 440 billion euro ($588 billion) bailout fund and a new 500 billion euro facility. Negotiations were started about pairing the two, according to two people familiar with the discussions, Bloomberg News reported on Oct. 20.

The euro dropped as much as 0.2 percent against its nine developed-nation counterparts to the lowest level since Sept. 21, according to Bloomberg Correlation-Weighted Indexes. The yen has advanced 2.2 percent in the past month, the best performance, and the dollar has strengthened 2.1 percent.

The ECB will reduce its benchmark rate to 1 percent from 1.25 percent tomorrow, according to the median estimate of economists surveyed by Bloomberg News.

ECB Choices

Additional options that the central bank is considering include loosening collateral criteria so that institutions have more access to cheap ECB cash and offering them longer-term loans to grease the flow of credit to the economy, said the officials, who spoke on condition of anonymity because the discussions are private. Two said an interest rate cut is likely, with only the size of the reduction to be determined for the monthly decision tomorrow.

“We could see a rate cut tomorrow, as well as a little bit of disappointment over the prospects for the EU summit,” said Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York. “While austerity and budget discipline and sanctions are worthwhile causes, you still have a debt problem.”

The Dollar Index (DXY), which IntercontinentalExchange Inc. uses to track the U.S. currency against those of six major trading partners, dropped 0.1 percent to 78.411.

Stocks Factor

Never before has the euro influenced U.S. stocks as much as this year, a sign that American equities aren’t going anywhere until Europe’s credit crisis is solved.

The link between the Dow Jones Industrial Average and swings in the currency reached a record on Dec. 2, according to data compiled by Bloomberg. The so-called correlation coefficient showing how much two markets rise and fall in tandem hit 0.85, the highest level since the euro was founded in 1999, data on 60-day rolling averages show. A reading of 1 means assets are moving in lockstep.

The pound may depreciate in 2012 as waning growth in the euro zone adds a headwind to the nation’s already tepid economic recovery and global investors reduce purchases of its debt, according to Morgan Stanley.

The pound, which traded at $1.5710 today, will slide in 2012 to a trough of $1.39 by the end of the third quarter, Tim Davis, a currency strategist at Morgan Stanley, wrote in a note today. The currency will end the year at $1.41, he wrote.

To contact the reporter on this story: 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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