By Yasuhiko Seki and Yoshiaki Nohara Dec. 14 (Bloomberg) -- The euro and the pound rallied after Abu Dhabi’s pledge to bail out Dubai relieved concerns that Europe’s biggest banks will suffer writedowns on loans in the gulf state. The European currency gained against the dollar after Dubai said it will use some of the funds to pay “trade creditors and contractors as well as meet interest expenses and company working capital.” The pound and Asian stocks erased losses as investor demand for higher-yielding assets rebounded. “The announcement by Dubai will remove some uncertainties over the debt situation there and dispel worries over credit losses by financial institutions in the U.K and Europe,” said Masafumi Yamamoto, chief strategist in Tokyo at Barclays Capital Plc. “It will make it easier to buy the pound and euro.” The euro climbed to $1.4678 as of 6:45 a.m. in London from $1.4615 in New York on Dec. 11, when it declined to $1.4586, the weakest level since Oct. 5. The 16-nation currency traded at 130.17 yen from 130.24 yen, after dropping as much as 0.8 percent. The yen traded at 88.68 per dollar from 89.10. The pound rose to $1.6284 from $$1.6262 in New York, erasing an intraday drop of 0.4 percent. The MSCI Asia Pacific Index of shares advanced 0.5 percent, reversing a 0.6 percent decline. Property Boom Abu Dhabi provided $10 billion to help state-owned Dubai World meet its obligations, including $4.1 billion needed to repay an Islamic bond maturing today for the real-estate unit Nakheel PJSC, Dubai’s government said in an e-mailed statement today. Nakheel accumulated debt during a five-year real-estate boom in Dubai, when the sheikhdom borrowed $10 billion and its state-controlled companies $70 billion to help diversify the economy. Royal Bank of Scotland Group Plc was the biggest underwriter of loans to Dubai World, according to JPMorgan Chase & Co. British banks, including RBS and HSBC Holdings Plc arranged about $4.4 billion of Dubai World’s loans, according to a report by Bank of America Merrill Lynch. “The news regarding Dubai is a good factor for the euro and pound,” said Masashi Hashimoto, a Tokyo-based senior analyst at Bank of Tokyo-Mitsubishi UFJ Ltd. “Risk aversion moves are abating.” Gains in the euro were tempered on speculation the credit ratings of European nations will come under pressure. Spain had the outlook on its AA+ debt rating cut to “negative” from “stable” by Standard & Poor’s last week. Greece’s credit was reduced one step to BBB+ by Fitch Ratings. Portugal’s outlook was also revised to “negative” from “stable” by S&P. Greece Reforms Greek Prime Minister George Papandreou will today outline structural reforms aimed at cutting his nation’s budget deficit. European Central Bank Vice President Lucas Papademos said last week Greece’s fiscal situation as “extremely serious.” “As investors are increasingly wary about credit risks in Europe, downside pressure on the euro seems to be rising,” said Toshihiko Sakai, head of trading for foreign exchange and financial products at Mitsubishi UFJ Trust & Banking Corp. in Tokyo. Demand for the euro was limited before reports forecast to show European industrial output fell and German investor confidence declined. Production in the 16 nations using the euro retreated 0.7 percent in October following a 0.3 percent increase the previous month, according to a Bloomberg News survey before the European Union’s statistics office in Luxembourg releases the data today. ZEW Report The ZEW Center for European Economic Research in Mannheim will say tomorrow its index of investor and analyst expectations, which aims to predict developments six months ahead, dropped to 50.0 from 51.1 in November, according to a separate survey. “The euro is likely to remain captive to downside risk, depending on the outcome of this week’s economic data,” said Toshiya Yamauchi, manager of foreign-exchange margin trading at Ueda Harlow Ltd. in Tokyo. The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 511 on Dec. 8, compared with net longs of 22,151 a week earlier. That’s the first time since April 28 that short bets outnumbered longs. The dollar has risen against the euro in the past two weeks after a Dec. 4 report showed that U.S. employers cut the fewest jobs in November since the recession began and unemployment unexpectedly fell, prompting traders to bet that the Federal Reserve will bring forward interest-rate increases. “Investor sentiment is turning away from the euro and tending to become less opposed to the dollar,” said Gareth Berry, a Singapore-based currency analyst at UBS AG. “It’s difficult to know for sure if it’s made a decisive switch, but certainly the correlation with risk appetite and the dollar has been loosening.” To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net.

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