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Euro Declines as European Officials Debate Aid, Ireland Budgets

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Dec. 6 (Bloomberg) -- The euro fell against most of its major counterparts as European officials showed divisions about how to contain the sovereign-debt crisis, damping appetite for the region’s currency.

The Dollar Index snapped a three-day losing streak after Federal Reserve Chairman Ben S. Bernanke said the central bank may boost purchases of U.S. debt. 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. Ireland, which was bailed out last month, will vote tomorrow on its budget, which must be passed for the aid package to go into effect.

“The disagreement within the euro zone about whether to expand the stability fund -- that has started to show some fault lines within the European Union,” said Brian Dolan, chief strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. “That weighs on the euro.”

The euro weakened 0.8 percent to $1.3308 at 5:03 p.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 110 yen, from 110.73. It touched 111.19 yen on Dec. 2, the strongest since Nov. 29.

The 16-nation euro weakened against 11 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 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.

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 euro may weaken to $1.25 in the first three months of 2011, according to analysts at HSBC Bank Plc, which cited the region’s sovereign debt problems. The firm had previously forecast the euro to trade close to $1.35 through 2011.

Correlation Weight

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 82.66 yen, from 82.53 yen on Dec. 3, the lowest since Nov. 15. The Dollar Index, which tracks the U.S. currency against six trading partners including the euro and yen, gained 0.3 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.

“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.

“Bernanke talking, that’s what scared the markets today,” said Fabian Eliasson, head of U.S. currency sales at Mizuho Financial Group Inc. in New York. “People thought that the recovery was catching up a bit and gaining speed. His comments put the brakes on that a little bit.”

Brazil Rates

The Brazilian real gained 0.7 percent versus the greenback for the best performance among the 16 most-traded currencies as investors bet the central bank will increase borrowing costs to curb inflation.

The real traded at 1.6749 per dollar. Brazil’s central bank will raise its benchmark Selic interest rate 50 basis points, or 0.5 percentage point, to 11.25 percent in January, according to the median forecast in a Dec. 3 central bank survey published today.

Canada’s dollar dropped from almost the highest level in more than three weeks versus its U.S. counterpart before the Bank of Canada meets tomorrow to determine interest rates.

The currency, nicknamed the loonie, traded at C$1.0054. It touched C$1.0003 Dec. 3, the strongest level since Nov. 11.

All 24 economists in a Bloomberg News survey expect the central bank’s governor, Mark Carney, to keep the target lending rate at 1 percent.

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 1.7 percent to 209.55 per dollar, from 206.15. It has lost 10 percent this year.

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

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