Euro Drops Amid Speculation Bailout Fund Effort Falling Short

The euro dropped versus the majority of its most-traded counterparts amid speculation Europe’s effort to expand its bailout fund to 1 trillion euros ($1.3 trillion) is falling short.

The 17-nation currency pared early gains versus the dollar after the European Central Bank failed to offset extra liquidity created by its bond purchases. Italy must move quickly to overhaul its economy, said a European Commission report to the region’s finance ministers meeting today. Mexico’s peso, Australia’s dollar and Sweden’s krona were the biggest winners versus the greenback as investors sought higher-yielding assets.

“The uncertainty factor is very high right now, and it’s hard to see what it is that could actually draw the line firmly under this crisis,” said David Mann, regional head of research for the Americas at Standard Chartered Plc. in New York. “The only reason why we haven’t been able to break much lower is because the market is already so short euros.” A short position is a bet the price of an asset will fall.

The euro was little changed at $1.3317 at 5 p.m. New York time, after earlier gaining to as high as $1.3442, the strongest level since Nov. 23. It appreciated 0.6 percent yesterday. The shared currency slipped 0.1 percent to 103.77 yen. The dollar weakened less than 0.1 percent to 77.93 yen.

Futures traders increased bets the euro would weaken against the dollar to 85,068 last week, the most since June 2010, figures from the Commodity Futures Trading Commission showed. Mann said the euro would likely depreciate further if it breaks through a level where sell orders may be clustered at $1.3146, last touched on Oct. 4.

Confidence Climbs

The Standard & Poor’s 500 Index rose as high as 0.9 percent as the Conference Board’s index of U.S. consumer confidence increased to 56 this month from a reading of 40.9 in October, the biggest monthly gain since April 2003.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, was down 0.2 percent to 79.076 after earlier dropping as much as 0.9 percent.

Australia’s dollar rallied for a second day against the greenback, rising 1 percent to $1.0004. It fell for the past four weeks. The Aussie pared its drop for November to 5 percent. Canada’s dollar gained 0.2 percent to C$1.0321 per U.S. dollar.

The Mexican peso climbed 1.5 percent to 13.8230 per dollar. Mexico’s central bank will auction $400 million of reserves daily starting tomorrow to provide liquidity and as a preventative measure, according to an e-mailed statement from the nation’s Currency Exchange Commission.

‘Difficult to Reach’

Europe’s efforts to expand its temporary rescue fund are flagging, forcing renewed consideration of a role for the ECB in insulating Spain and Italy from the debt crisis.

An agreement hammered out last month to expand the European Financial Stability Facility’s firepower to 1 trillion euros with leveraging will be “very difficult to reach,” Luxembourg Finance Minister Luc Frieden told reporters today before euro-area finance chiefs met in Brussels.

With prodding from the U.S. after a series of stop-gap accords failed to protect Italy and Spain from market turmoil, the ministers started talks on channeling ECB loans to cash-strapped euro nations through the International Monetary Fund, aiming to bring the central bank on to the front lines without violating its ban on direct lending to governments.

Unsure on Changes

“I’m not sure you’re going to be seeing any changes,” said Fabian Eliasson, head of U.S. currency sales at Mizuho Financial Group Inc. in New York. “I don’t think that yesterday’s rally in the euro was any long-term conviction that everything is good.”

The euro had its biggest intraday jump yesterday versus the dollar in more than two weeks, 1.2 percent, after leaders including German Chancellor Angela Merkel urged fast-track treaty changes to tighten budget discipline. Today’s meeting precedes a Dec. 9 leaders’ summit.

The ECB failed to fully offset the extra liquidity created by its bond purchases for the first time in seven months. It was the first failure since the ECB expanded its program in August to buy Italian and Spanish bonds. The central bank said 85 banks bid a total of 194.2 billion euros for seven-day term deposits. It had aimed to drain 203.5 billion euros.

Italy raised 7.5 billion euros at an auction today. It agreed to pay a yield of 7.89 percent on three-year notes, up from 4.93 percent at a sale of similar-maturity debt last month.

“While Italy can weather through a short-lived debt-market turbulence, the risks of a full-blown sovereign liquidity crisis can increase rapidly in the absence of a determined policy response,” the European Commission, the European Union’s executive, said in the report presented to finance ministers.

Funding Cost Climbs

The cost for European banks to fund in dollars rose for a fifth day and was at almost the most expensive level since the depth of the financial crisis. The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, touched 1.59 percentage points below the euro interbank offered rate today. It reached 1.61 percentage points Nov. 25, the most expensive on an intraday basis since October 2008. The average level this year is 0.53 percentage points.

“It’s a death struggle for this currency,” John Taylor, founder of the world’s largest currency hedge fund FX Concepts LLC, said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “The outlook is bleak, but there’s always the hope that the bleaker it gets, the more the governments are going to wake up and do something.”

The euro fell 0.4 percent over the past month against nine developed-nation counterparts tracked by Bloomberg Correlation-Weighted Currency Indexes. The dollar rose 6.2 percent in the best performance, while Sweden’s krona dropped 2.4 percent.

The krona strengthened today after data showed Sweden’s economy grew an annual 4.6 percent in the third quarter, exceeding analyst estimates for a 3.4 percent expansion. The currency appreciated 1.2 percent to 9.1767 per euro. Against the dollar, it gained 1.1 percent to 6.8912.

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