Dec. 14 (Bloomberg) -- The euro rallied after Abu Dhabi pledged to bail out Dubai, easing concern that Europe’s biggest banks will suffer writedowns on loans in the Gulf emirate.
The European currency rose against the dollar while the pound pared its declines as stocks rebounded 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 yen gained against all but one of the 16 most-traded currencies tracked by Bloomberg after the Tankan index of confidence among Japanese manufacturers increased.
“The all-dominating news is Abu Dhabi bailing out Dubai and it has added to the risk-on sentiment for now, sending euro- dollar higher,’’ Kasper Kirkegaard, a currency analyst with Danske Bank A/S, said in an interview with Bloomberg Television from Copenhagen.
The euro climbed to $1.4675 as of 8:09 a.m. in London from $1.4615 in New York last week, when it declined to $1.4586, the weakest level since Oct. 5. The 16-nation currency traded at 130.19 yen from 130.24 yen, after dropping as low as 129.18 yen earlier. The yen traded at 88.71 per dollar from 89.10.
The MSCI World Index of shares advanced 0.4 percent, reversing a 0.1 percent decline, after the Dubai government said 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. Nakheel accumulated debt during a five-year real-estate boom in Dubai, when the sheikhdom borrowed $10 billion and its state-controlled companies a further $70 billion.
Pound Rebounds
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 pound pared declines versus the dollar, trading at $1.6253, from $1.6262 last week and as low as $1.6190 earlier.
“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.”
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 also 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.
‘Less Opposed to Dollar’
“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.”
The yen advanced most against Taiwan and Australia’s dollar after the Tankan report, rising 0.9 percent and 0.7 percent, respectively. The index of sentiment among big makers of products including cars and electronics climbed nine points to minus 24 in December, the Bank of Japan said in Tokyo today. The median forecast of 19 economists surveyed by Bloomberg News was minus 27. A negative number means pessimists outnumber optimists.
To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net.
Last Updated: December 14, 2009 03:25 EST
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