Euro Falls Versus Dollar as EU Prepares to Double Crisis Fund

By Kim-Mai Cutler

March 20 (Bloomberg) -- The euro fell against the dollar as European Union leaders prepared to double a credit line for member states in financial distress.

The euro slid from near a two-month high against the U.S. currency after European Commission President Jose Barroso said leaders may agree today to boost the amount of cash for struggling countries to 50 billion euros ($68 billion) from 25 billion. The dollar rose as some traders bet the slump this week stoked by the Federal Reserve’s plan to start buying Treasuries was overdone given the outlook for the U.S. economy.

“Investors are concerned that such a bailout would be a liability for the European Union, especially the euro zone,” said Geoffrey Yu, a London-based strategist for UBS AG, the world’s second-largest foreign-exchange trader. “Any rescue would be positive for risk appetite. But if the euro zone is bearing the cost alone, it will be seen as euro negative.” 

The euro declined to $1.3569 as of 7:39 a.m. in New York, from $1.3665 yesterday, when it touched $1.3738, the strongest level since Jan. 9. The single currency advanced 4.9 percent versus the dollar this week. The dollar strengthened to 95.51 yen, from 94.51 yesterday. The yen was at 129.55 per euro, from 129.17 yesterday.

Increased funds for beleaguered economies will show “solidarity” with EU members that haven’t yet adopted the euro, Barroso said at the leaders’ two-day summit in Brussels. French President Nicolas Sarkozy backed the increase because of the higher risks of financial stress in central European countries, a French official told reporters. Eight of the 11 eligible countries are in eastern Europe.

Weekly Gains 

The euro’s slide pared earlier gains that put the dollar on course for its biggest decline versus the single currency on record following the Fed’s March 18 announcement. The U.S. central bank said its balance sheet will grow by as much as $1.15 trillion as it buys as much as $300 billion of government debt and increases mortgage-bond purchases.

Stocks rose this week while crude oil headed for a fifth week of gains, the longest winning streak in 11 months, on speculation the Fed’s measures will revive the economy. The MSCI World Index climbed 5.5 percent and the Standard & Poor’s 500 Index gained 3.6 percent. Oil traded above $50 a barrel yesterday following a more-than 10 percent advance this week. 

“The rise in risk appetite may be sustained in the near term, which would make the dollar weaker still,” a team led by Vincent Chaigneau, head of fixed-income and currency strategy for Societe Generale SA in London, wrote in a research note dated today. “We remain skeptical about the durability of that run, but still believe that the newly found dollar weakness could last.” 

The dollar’s 15-day relative strength index, a chart used by technical analysts, was at 30.32 today. It slid as low as 26.39 yesterday, below the 30 level that typically signals a change in price direction.

To contact the reporter on this story: Kim-Mai Cutler in London at kcutler@bloomberg.net
Last Updated: March 20, 2009 07:43 EDT