Euro drops against most currencies amid concern

THE euro has fallen to an 11-month low against the dollar on concern that European leaders won’t agree on ways to expand the region’s rescue capacities as debt-strappedcountries struggle to fund their deficits.

The 17-nation currency dropped against most of its major counterparts after Chancellor Angela Merkel told German coalition politicians that the €500 billion cap on Europe’s planned permanent bailout fund will stay in place, according to two sources.

The dollar declined against the yen before the Federal Reserve holds a meeting today amid speculation that officials will maintain their pledge to keep borrowing costs at almost zero.

“You continue to see strains within the euro group,” said John McCarthy, managing director of currency trading at ING Groep NV in New York.

“A division means a lower euro. The euro was already a little weaker and once we got convincingly through $1.3170, it dropped more,” he said.

The Norwegian krone and Sweden’s krona slid the most against the dollar among the 16 major currencies tracked by Bloomberg. The krone dropped 1.3% to 5.9098 per dollar and the krona weakened 1.1% against the dollar to 6.9473.

Merkel, in a meeting of her Christian Democratic caucus in Berlin yesterday, confirmed the limit on the European Stability Mechanism as agreed by European Union leaders at a summit last week, the sources said.

“The reluctance to raise the ceiling of the permanent bailout fund is like taking candy from a baby,” said Tommy Molloy, chief dealer at FX Solutions, a currency brokerage, in Saddle River, New Jersey.

“The very fact that there is any sort of reluctance to fix any problem as it arises suggests that the consensus that we thought was going to start with the EU summit last week really isn’t there,” he said.

European leaders unveiled a blueprint last week for a closer fiscal accord to save the currency, adding €200bn to their current bailout fund and tightening rules to curb future debts.

They also agreed to move up the creation of the ESM and said that by March the EU will reassess plans to cap the overall lending of the ESM and the temporary fund at €500bn.

For the time being, Germany deflected a move to grant the ESM a banking license, which would enable it to multiply its firepower by borrowing from the ECB.

The cost for European banks to borrow in dollars rose to the highest in two weeks, according to money-market indicators.

The euro rose earlier after the European bailout fund held its first auction of bills, attracting bids for more than three times the amount of securities that it sold. The European Financial Stability Facility sold €1.97bn of 91-day bills at an average yield of 0.222%, the Bundesbank said yesterday.

The sale was its first fundraising since European leaders agree on a closer fiscal accord and additional resources to combat the region’s debt crisis at a summit in Brussels last week.

Bloomberg