Contagion fears persist; rising U.S. yields bolster dollar
By William L. Watts and Sarah Turner, MarketWatch
LONDON (MarketWatch) —The euro regained its footing versus the U.S. dollar on Monday, but price action remained choppy a day after the European Union approved an 85-billion-euro ($112.5 billion) bailout plan for Ireland and watered down a proposal to make bondholders share the cost of future sovereign rescues.
The single currency (EURUSD 1.3196, -0.0089, -0.6699%) traded at $1.3257, up from around $1.3222 in North American trade on Friday.
The size of the bailout was in line with market expectations, but concerns remain over the ability of Irish Prime Minister Brian Cowen to pass the teetering coalition government’s 2011 budget plan on Dec. 7, said Stephan Maier, currency strategist at UniCredit Bank in Milan.
While the government, which has a razor-thin majority in the lower house of parliament, is likely to succeed in winning passage, nervousness will likely prevail in the run-up to the vote, he said.
Meanwhile, concerns about Portugal and Spain haven’t been dispelled and may continue to weigh on the single currency, Maier said.
The Irish rescue package includes €10 billion for banking recapitalization, €25 billion to support the banking system on a contingency basis and €50 billion for government budget needs. Read more on Ireland's bailout
The average interest rate on the funds is 5.8%. Ireland also gets an extra year — until 2015 — to bring its budget deficit down to the EU’s cap of 3% of gross domestic product.
Excluding the cost of bailing out its banking sector, Ireland’s deficit is seen at more than 11% of GDP this year.
“News that Ireland is to receive emergency financing from the European Union and the International Monetary Fund has not relieved market tension,” noted currency strategists at Nomura.
“Indeed, because of continuing uncertainty over political coordination and over the package’s details, fears of contagion have been exacerbated. It is almost taken for granted that Portugal will need external support, so investors have focused on Spain,” added the Nomura strategists.
The yield premium demanded by investors to hold Spanish and Portuguese government bonds narrowed slightly on Monday.
The dollar index (DXY 80.52, +0.17, +0.21%) , a measure of the U.S. unit against a basket of major rivals, traded at 80.240, down slightly from 80.378 on Friday.
Against the yen, the dollar (USDYEN 84.0600, +0.0300, +0.0357%) bought ¥83.99, little changed from ¥84.02 Friday.
The British pound (GBPUSD 1.5580, -0.0011, -0.0705%) rose 0.2% versus the dollar to change hands at $1.5617.
The Swedish krona was holding strong gains versus the euro and the dollar after the government’s statistics agency said third-quarter gross domestic product expanded by a seasonally-adjusted 2.1% on a quarterly basis and grew 6.9% on an annual measure.
The krona traded at 9.2107 per euro, up 0.6% from Friday. The currency (USDSEK 6.9937, +0.0185, +0.2654%) traded at a rate of 6.9406 per dollar, a rise of 0.8%.
“In terms of monetary policy, our central scenario is for the next rate hike to be delivered in February, although today’s stronger-than-expected report indicates that the probability of a December move has increased significantly,” said Nick Verdi, economist at Barclays Capital, in a research note.
