Euro rises near October high before key vote

AP News
Posted: Oct 11, 2011 4:04 PM
Euro rises near October high before key vote

The euro rose back near its October high versus the dollar Tuesday before a key vote on expanding Europe's bailout powers.

A "no" vote by the Slovakian parliament could scuttle the plan, setting back efforts to contain the European debt crisis. The plan was outlined in July, and already has been approved by the other 16 nations that use the euro.

The euro leaped on Monday after the leaders of France and Germany said they would release a plan to shore up struggling European banks by the end of the month. Their pledge made traders hopeful that Greece's likely default will occur without major damage to the financial system.

The euro rose to $1.3669 at 3:06 p.m. Eastern time, from $1.3594 late Monday. It hit $1.3684 earlier Tuesday, just below Monday's October high of $1.3698.

Even if Slovakian lawmakers agree to expand the bailout, Europe's economy and banking system will face serious threats. Banks are struggling because of expected losses on Greece government debt and other countries that might default. Deep spending cuts by those governments have hobbled Europe's economy. Many economists expect it to enter a recession by the end of the year.

The euro has been rising since last week, in part because the European Central Bank failed to cut interest rates, surprising many forecasters. Higher rates make a currency more attractive to traders by increasing their returns from certain fixed-income investments. Concerns that the Federal Reserve will seek to push U.S. rates lower also helped the euro.

Before the five-day rally, the euro had dropped to its weakest rate against the dollar since January. Many traders sold euros because they expected the ECB to cut interest rates. Fears that a default by Greece would hurt the regional economy also hurt the currency.

The dollar, meanwhile, benefited from those jitters. The dollar is seen as safe and relatively stable. Traders often buy it after selling other investments that might lose value.

Julian Jessop, chief global economist with Capital Economics, said traders probably overreacted to news this weekend of a possible rescue plan from France and Germany. Any such plan would have to include an "orderly" Greek default, more money for European nations with too much debt and massive bank bailouts.

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"Even if a credible deal can be struck to limit the immediate contagion from the problems in Greece, which is doubtful, there are many other countries in the euro that face a long and painful road to rebuild public finances and/or restore competitiveness," he said in a research note.

In addition to Greece, Ireland and Portugal have also received financial lifelines from international lenders.

Jessop repeated his forecast that the euro will fall to $1.30 by the end of the year.

In other trading, the dollar fell to 76.66 Japanese yen from 76.69 late Monday. The British pound fell to $1.5594 from $1.5673. The dollar rose to 1.0299 Canadian dollar from 1.0281 Canadian dollar.