FOREX-Euro rallies after rescue package, euro bond buying

* Euro up 2.3 pct vs dollar, off last week’s 14-mth low

* Aid package, bond buying and c.bank FX swap lines help

* Unclear if package gives long-term support for euro

By Natsuko Waki

LONDON, May 10 (BestGrowthStock) – The euro rallied from last week’s
14-month low against the dollar on Monday after policymakers
agreed on a $1 trillion emergency package to stabilise the euro
and euro zone central banks began buying local government debt.

The aid package, hammered out by European Union finance
ministers, central bankers and the International Monetary Fund,
was the biggest since Group of 20 leaders rolled out support
measures after the collapse of Lehman Brothers in 2008.

The plan calmed investor nerves after contagion fears
triggered a global rout in equities and other risky assets last
week, leading to a broad rally in the euro and equities.

Central banks in Finland, Germany and France confirmed euro
zone central banks have started buying government bonds
[nLDE6490XA] [nWEA1259] [nPAB008345].

Uncertainty persisted however, over whether the package
would give the euro lasting support since Greece and other
peripheral euro zone countries must tackle fiscal deficits when
their growth outlook is deteriorating.

“The package announced yesterday was supportive of euro
sentiment. There is some uncertainty lingering about the
mechanisms of the stabilisation funds, however. In particular,
it is still unclear where the money for the funds is going to
come from,” said Valentin Marinov, currency strategist at
Societe Generale.

“In the case of Greece, very protracted economic recovery
could lead to more funding needs.”

By 0945 GMT the euro was up 2.3 percent at $1.3056 (EUR=: ),
having fallen to $1.2510 on trading platform EBS last week. The
euro was on track for making its biggest one-day gain since
November 2008.

Mounting short positions on the euro prompted investors to
cover their positions, helping the single currency recover.

Latest data from CFTC showed currency speculators boosted
bets in favour of the dollar to a level strategists said was the
highest since the euro’s launch in 1999 [IMM/FX].

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For a graphic on euro short positions, click on:

http://graphics.thomsonreuters.com/0210/EZ_ERCFTC0210.gif

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The single currency is still down nearly 9 percent since
January, making it the worst performing major currency.

The euro rose 4.4 percent to 121.94 yen (EURJPY=: ) after
hitting an eight-year low near 110.44 last week.

“The current euro rally should not be confused with a
long-term trend change,” BNP Paribas said in a note to clients.

“Currency reallocation has been an important factor driving
the euro higher over the past 10 years, but going forward we
expect central banks to stay sidelined as they wait
to see how this monetary experiment will progress.”

The dollar fell 1.7 percent against a basket of major
currencies to 83.01 (.DXY: ). The U.S. Federal Reserve reopened
currency swap facilities with other major central banks on
Sunday to ease market strains in Europe.

The Fed revived facilities established during the 2007-2008
financial crisis with the European Central Bank, and the central
banks of Canada, the UK and Switzerland.

POLITICAL STALEMATE

Sterling rose 1.3 percent to $1.4991 (GBP=D4: ), helped by a
broader recovery in risky assets, while it fell over 1 percent
to 87.09 pence per euro (EURGBP=: ).

Britain’s opposition Conservatives and Liberal Democrats
resumed talks on Monday to reach a deal to govern
[ID:nLDE6480O4]. Investors are concerned a political stalemate
will hamper efforts to tackle the UK’s huge public deficits.

Such concerns pushed the pound to one-year lows of $1.4475
on Friday.

“The longer political leaders dilly-dally about the
leadership then sterling will stay under pressure,” said David
Scutt, a FX trader at Arab Australia Bank in Sydney.

The Bank of England is expected to leave interest rates at
0.5 percent and not to undertake further quantitative easing
purchases when it concludes its Monetary Policy Committee
meeting on Monday. [ID:nLDE6461UP]

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(Graphic by Scott Barber, editing by Nigel Stephenson)

FOREX-Euro rallies after rescue package, euro bond buying