German Chancellor AngelaMerkel’s coalition party voted to enhance the Euro Zone Financial Stability Fund’spowers, joining 10 other countries that have approved an expansion that would increase the euro zone’s firepower to help debt-ridden countries.
Hopes that policymakers are finally acting to prevent the debt crisis from worsening have supported the euro in the past few sessions, lifting it off aneight-month low of $1.3360 set on Monday. But traders cautioned the euro’s rally maylose steam ahead of offers suspected around $1.3680-1.3700.
The yield on the Greek 10-year bond fell for the third day, declining 37 basis points to 22.68 percent. That drove the difference in yield with benchmark German bunds down by 36 basis points to 2,066 basis points. The yield on Italy’s 10-year bond slipped nine basis points to 5.60 percent after the government sold 7.9 billion euros ($10.8 billion) of debt. The Portuguese 10-year yield dropped 42 basis points to 11.17 percent, falling for a second day, with similar-maturity Irish yields retreating for the fourth straight day toreach 7.64 percent, the lowest since November.
The single currency was still on track to mark its worst quarter since early 2010, with traders wary over potential for further falls, on nagging worries over the prospect of Greek default and constant bickering by European policy-makers over the response to the crisis.
The dollar index nudged 0.3 percent lower to 77.644, off an eight-month peak of 78.863 struck on Monday, with some analysts saying its recent safe-haven strength may be undermined by expectations of more easing by the Federal Reserve.
The lack of sustained gains for the euro comes as investors now shift teir attention to a vote on the EFSF package by Slovakia, as well as efforts to further beef up the EFSF and nextweek’s European Central Bank meeting, said Kit Juckes, head of foreign exchange at Societe Generale.
“I think our markets have fairly well priced in all but the most draconian of scenarios,” Wilbur Ross, the billionaire chairman of private-equity firm WL Ross &Co., said today in an interview onBloomberg Television’s “In the Loop” with Betty Liu. “Unless something really calamitous happens,” such as a default of a larger European country like Spain or Italy, “short of that I think we’ve pretty well priced things in.”
In addition to optimistic reports from the Eurozone, sterling has dropped on the back of troubling data from the Bank of England this morning.In its latest FPC (Financial Policy Committee) report, the BoE urged British banks to replenish their balance sheets, on the chance that tensions inthe Eurozone could prompt a crisis ala 2008. The FPC report stated that markets remain under extremestress on Eurozone problems, and advised banks to top up their capital reserves so as not to constrain credit to British businesses and consumers.
The Aussie, along with its dollar-bloc counterparts from New Zealand and Canada rose further off of recent lows overnight. The general improvement throughout markets boosted the appeal of riskier and higher yielding assets. However, the fragility of the rally in risk assets and the still very uncertainty outlook for Europeand Asia should ultimately keep this group’s upside limited.
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