MW: Dollar falls against euro as Greek rescue hopes rise
NEW YORK (MarketWatch) -- The dollar declined versus the euro on Tuesday as speculation mounted over a possible Brussels-led rescue of Greece and other heavily-indebted southern European countries.
The dollar gained versus the Japanese yen, however. The pair tends to remain closely tied to investors' appetite for risky assets and swings in equity markets, with the yen tending to lose more often when investors snap up stocks, commodities and other assets perceived as risky.
The euro rose to $1.3742, up from $1.3674 North American trade late Monday. The euro slumped to an eight-month low versus the dollar last week as worries rose about the potential for default by Greece, Portugal, Spain and other countries on the periphery of the euro.
The dollar index (DXY 79.97, -0.33, -0.42%) , which tracks the greenback against a trade-weighted basket of six major currencies, fell by the most since November, to 79.981 from 80.309 in late North American trading on Monday.
The dollar bought 89.45 yen, compared to 89.39 yen late Monday. Japan's interest rates are among the lowest of major countries, and expected to remain low for some time, making the yen an attractive currency to borrow in. Traders borrow cheaply in yen to invest in higher-yielding assets, making money on the difference in so-called carry trades.
Stocks jumped, with the Dow Jones Industrial Average (SPX 1,065, +8.30, +0.79%) up 121 points to 10,027, and the Standard & Poor's 500 Index (SPX 1,065, +8.30, +0.79%) 1% higher.
The euro's rebound was attributed to news that European Central Bank President Jean-Claude Trichet planned to fly back from Australia earlier than originally scheduled to attend a Thursday meeting of European Union leaders to discuss the economic outlook. The move sparked expectations that the E.U. may be working toward some sort of plan to shore up debt-burdened countries. Read about market reaction to Trichet's flight change.
Although the ECB said Trichet had always intended to attend the meeting, Read First Take.
"A key building block of the E.U. in general and the Euro-zone in particular is the principle of 'solidarity'," said currency strategists at Citi. "As such, we expect some kind of assistance to eventually be forthcoming."
However, several analysts pointed to a build-up in short positions on the euro -- bets that the single currency would decline further. That positioning by the market makes it ripe for a reversal as traders unwind the shorts and book profits.
Euro 'underperformance'
Also, many still don't expect a bailout by the E.U, and not just because both Brussels and Athens say it isn't going to happen.
"The fact of the matter is that a bailout before Greece implements its austerity program is nonsensical," said strategists at Brown Brothers Harriman. "It is putting the before the horse."
Besides that, the euro is likely to be weighed long-term by the fiscal problems not just of Greece but Portugal and Spain as well, because they will prevent the ECB from raising interest rates as soon as it otherwise may have, analysst said.
"Strains on the periphery of the Euro-zone likewise could delay the ECB's exit from recent accommodation, which would only reinforce the impact of likely cyclical underperformance versus the U.S.," Citi strategist wrote in a note.
