Dollar up against euro as Europe's leaders bicker

AP News
Posted: Sep 28, 2011 5:14 PM
Dollar up against euro as Europe's leaders bicker

The dollar rose against the euro and other currencies Wednesday as doubts about Europe's ability to solve its debt crisis drew traders to safer bets.

Strategists with Bank of America Merrill Lynch lowered their outlook for the euro sharply, citing fears that Greece will go bankrupt, which could roil world markets and possibly tip Europe into recession.

"All forces that have been supporting (the euro) early this year are losing steam or have reversed course," foreign exchange strategist Athanasios Vamvakidis wrote in a research note.

By the end of this year, the bank expects the euro to fetch $1.30, down from an earlier forecast of $1.45. It expects the euro to dip as low as $1.28 in the first quarter of 2012, then recover to roughly its current strength by year's end.

The euro has been worth more than $1.30 since January.

The "sharp slowing of the global economy, particularly in the emerging markets, the rising recession risks, and the risk-off market sentiment" prompted the revision, Vamvakidis wrote.

Vamvakidis said Europe's economy is deteriorating quickly. A default by Greece looks more likely; borrowing costs for Italy and Spain are increasing, suggesting the debt crisis might spread; and the crucial system of bank-to-bank lending is "in turmoil," he wrote.

Likely interest-rate hikes by the European Central Bank also threaten to weaken the euro. Low interest rates make a currency less attractive by reducing the income investors receive from debt securities such as government bonds.

Discouraging news reports from Europe squelched an early rally on Wall Street and stoked demand for lower-risk bets. The dollar is seen as a safe investment mainly because it gives traders access to U.S. Treasurys. Traders still see Treasurys as the world's safest investment, despite a recent downgrade of the U.S. government's credit rating by Standard & Poor's.

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German Chancellor Angela Merkel suggested that the Greek bailout package might have to be rejiggered. Many countries think the plan should force banks to take deeper losses on their holdings of Greek debt. France strongly disagrees with that idea, according to published reports. French banks hold billions in Greek debt.

The dollar rose against a basket of seven major currencies. It had fallen overnight to its lowest level in a week.

In late trading, the euro fell to $1.3582 from $1.3641 late Tuesday. The British pound fell to $1.5609 from $1.5654.

The dollar rose to 0.8978 Swiss franc from 0.8953. It rose to 1.0285 Canadian dollar from 1.0174.

The dollar fell to 76.53 Japanese yen from 76.75 Japanese yen.