Hopes euro region stays intact spark bounce back over dollar
Single currency buoyed by talks to use bailout fund for banks
THE euro rebounded against the dollar and the yen yesterday as investors pared bearish bets on hopes that European authorities may be able to keep the region intact, although Spain's ailing banks and slowing global growth should cap the currency's gains.
The euro, which was ripe for a bounce given a record high in net speculative short positioning, was buoyed by news that France and the European Commission signalled their support for an ambitious plan to use the eurozone's permanent bailout fund to rescue stricken banks.
While European officials are trying to reassure investors that they can contain an escalating crisis, many market participants remain bearish on the single currency and believe the euro's strength should prove temporary.
"The euro last traded 0.4pc higher at $1.2482, up from $1.2286 on Friday, its lowest since July 2010. Yesterday's peak of $1.2509 was a four-day high. With London markets closed for a bank holiday, volume was thin until the New York session.
A rally in Europe's troubled banking sector lifted battered Spanish, French and Italian stocks, with the eurozone's blue-chip Euro STOXX 50 index closing up 0.5pc. An index of the eurozone banking sector rose 3.4pc.
Comments from ECB policymaker Ewald Nowotny saying he supported the idea of a European banking union gave the euro an early boost. More insight on potential monetary easing may come from tomorrow's ECB meeting, and markets are positioning for an outside chance of a rate cut.
"The outlook of the euro will depend on how ready and willing the European Central Bank is to provide stimulus to the European economy," said Kathy Lien, director of currency research at GFT in Jersey City.
"They (the ECB) have made it clear that they want the solution to come from Europe's leaders, but the recent deterioration in economic data and slide in asset prices makes easier monetary policy inevitable."
Meanwhile, US stocks fell modestly on news that orders to US factories unexpectedly fell in April for a second month, adding to the gloom.
Bookings dropped 0.6pc after a revised 2.1pc fall in March, the first back-to-back declines in more than three years, figures from the Commerce Department showed yesterday in Washington. Economists had projected a 0.2pc gain.
Slowdowns in Europe and parts of Asia combined with a cooling in business spending in the US following a reduction in a government tax credit may limit manufacturing this year.
A fall-off in hiring may also be causing American households to curb spending on big-ticket items like cars, eliminating another source of strength.
"There seems to be a bit of a downshift in business investment," Guy Berger, an economist at RBS said. "If we see a significant slowing of demand from here, that's going to put a hurdle on how fast manufacturing can go."
Signs of economic weakness around the globe and Europe's intensifying debt crisis have rattled investors, who have been piling out of riskier investments like commodities and equities for the perceived safety of higher rated government bonds.