`The euro rose against the dollar for a second day after European Union leaders agreed to create a mechanism to contain future debt shocks and the European Central Bank armed itself with more capital. The euro gained versus 13 of its 16 most-traded counterparts even as Moody’s Investors Service cut Ireland’s credit rating. The yen headed for a weekly loss against most of its major peers as Asian stocks advanced. The Swiss franc traded at a record versus the common currency. The EU summit result “sets the stage for further consolidation, such as cross-border guarantees” between member states’ debt, said Geoffrey Yu, a foreign-exchange strategist at UBS AG in London. The agreement “is not negative for the euro. If they had downgraded Ireland to junk right now I don’t think it would make too much of a difference, because the country is already shut out of markets anyway.” The euro rose 0.4 percent to $1.3297 at 8:51 a.m. in London from $1.3244 yesterday, when it gained 0.2 percent. The shared currency appreciated 0.6 percent to 111.78 yen from 111.14 yen. It was set for a 0.7 percent increase this week. The dollar fluctuated versus yen, trading little changed at 83.95 yen. It reached 84.51 on Dec. 15, the highest since Sept. 24. The Swiss franc was the biggest gainer against major currencies, climbing 0.5 percent against the dollar and trading little changed at 1.2776 against the euro. It earlier touched a record 1.2721. Irish Downgrade Moody’s today cut Ireland’s credit rating by five levels to Baa1 after the government was forced to ask for external aid last month, staggered by losses in the banking system. “The Irish government’s financial strength could decline further if economic growth were to be weaker than currently projected or the cost of stabilizing the banking system turn out to be higher than currently forecast,” Moody’s said in an e- mailed statement. EU leaders will wrap up a two-day summit today in Brussels. They agreed to amend the bloc’s treaties to create a permanent crisis-management mechanism that takes effect in 2013. The ECB said yesterday it will almost double its capital base to protect against losses as the institution buys bonds of governments from Portugal to Ireland to fight the debt crisis. Merkel, Sarkozy Germany, the biggest contributor to Europe’s bailouts of Greece and Ireland, pushed through a proposal that would allow financial aid “if indispensable” to underpin the euro and may force bondholders to bear some costs of future rescues. German Chancellor Angela Merkel has resisted boosting the EU’s 750- billion-euro emergency fund or making more flexible use of it. The euro’s survival is “non-negotiable,” requiring budget vigilance and closer economic cooperation to overcome “structural weaknesses” within the region, Merkel and French President Nicolas Sarkozy said on Dec. 10. “Merkel and Sarkozy are not enjoying much support from their domestic constituencies, and that keeps them from making commitments to other nations,” said Manabu Tamaru, a senior investment manager at Baring Asset Management in Tokyo. “While German economy picks up, you really can’t say Europe’s economy as a whole is improving. The euro may drop below $1.30.” A report today may show German confidence weakened. The Ifo institute’s business climate index, based on a survey of 7,000 executives, probably slipped to 109.0 from 109.3 in November, which was the highest since records for a reunified Germany began in 1991, the median of 36 forecasts in Bloomberg News survey shows. Weakening Yen The euro has dropped 9.4 percent this year in a measure of the currencies of 10 developed nations, according to Bloomberg Correlation-Weighted Currency Indexes. The yen has gained 10.1 percent, while the dollar is down 1.8 percent. The yen weakened against most of its major counterparts today as the MSCI Asia Pacific Index of regional shares rose 0.4 percent. People’s Bank of China Governor Zhou Xiaochuan said his nation won’t increase reserve ratios and interest rates at the same time, Hong Kong’s South China Morning Post reported, citing a speech at Peking University. Zhou said yesterday that increases in banks’ mandatory reserves don’t rule out interest rate increases, the Hong Kong- based English-language newspaper reported today. “Risk sentiment remains firm, supporting higher-yielding currencies against developed nations’ currencies,” said Koji Fukaya, chief currency strategist in Tokyo at Credit Suisse Group AG. “Currencies should strengthen against the yen.” To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

Source