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October 19, 2011

Euro flat on doubts over EU delivering crisis plan

By Richard Leong

NEW YORK | Wed Oct 19, 2011 5:11pm EDT

(Reuters) – The euro was little changed against the dollar and yen on Wednesday due to nagging doubts that European leaders will take aggressive steps at a summit this weekend to resolve the region’s debt crisis.

Officials dismissed a report in Britain’s Guardian newspaper on Tuesday that France and Germany had agreed to a deal enlarging the European Financial Stability Facility (EFSF), while French President Nicolas Sarkozy said talks to boost the bailout fund have stalled. But investors still clung to the newspaper report as a reason to pare back bets against the euro.

Optimism that a definitive plan would be in place by a European Union summit on Sunday had sparked a rally in the euro last week from 8-1/2-month lows. Germany later tamped down enthusiasm by saying the summit would not provide an ultimate solution to the debt crisis.

“At the end of the day, the market is nervous, waiting to see anything substantial coming out of the summit,” said Tom Fitzpatrick, chief technical strategist at CitiFX in New York. “We are getting to a point that there have been so many false promises so they really need to deliver something big.”

The euro was last up 0.09 percent at $1.37480 after bouncing between $1.3735 and $1.3870 on trading platform EBS. It touched a one-month high of $1.39148 on Monday.

Wavering confidence about a crisis plan has increased the euro’s volatility against the dollar this week. The one-month euro/dollar volatility index ended flat on Wednesday but is up 2.4 percent so far on the week.

The Guardian, citing senior European Union diplomats, said the euro zone would endorse a five-fold increase in the 440 billion euro bailout fund.

But a senior euro zone source told Reuters there had been no mention of such a deal. A spokesman for the German Finance Ministry said the bailout fund will not be raised beyond the 440 billion euros already approved nor will Germany’s participation rise beyond 211 billion euros.

German Chancellor Angela Merkel talked down expectations of a deal for a “bazooka” solution coming out of the summit, adding that past errors will not be solved in one stroke.

Germany, the euro zone’s strongest economy, has been reluctant to back aggressive measures to contain the crisis due to worries it has already overextended itself as its economy is slowing.

SHORTCOVERING, SOVEREIGN DEMAND

As traders struggle to position for this weekend’s EU summit, analysts said there are positive factors for the euro.

Chris Turner, FX strategist at ING, said demand to cover short positions in the euro remained high given that the average entry level of such positions in September was around $1.37. The euro’s rally above $1.39 earlier this week put investors at risk of a loss on those positions.

Going into the summit, Turner said, the euro may rally toward $1.40 if more mainstream press reports suggest EU leaders are nearing agreement to take decisive actions.

The euro briefly extended gains against the dollar after data showing U.S. housing starts in September topped expectations boosted the appetite for risk.

Sovereign demand from the Middle East and Asia likely also boosted the euro, traders said, although some doubted it was the dominant driver behind gains.

Against the yen, the euro was up 0.09 percent to 105.61 yen, paring earlier gains.

The single European currency rose 0.5 percent against the Swiss franc to 1.2418 francs, having hit 1.2475 on EBS, the highest level in five months, on persistent, though unconfirmed, market talk of the Swiss National Bank raising the euro/Swiss target rate from 1.20 francs.

Investors shrugged off a double-notch downgrade of Spain’s debt rating.

The dollar index was flat at 77.112, while the greenback was flat against the yen at 76.80 yen.

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