EUR Risks to Persist Despite Increase in Rescue Funds

on March 30 2012 9:33 AM
The Euro sculpture is pictured in front of the ECB headquarters in Frankfurt
The Euro sculpture is pictured in front of the headquarters of the European Central Bank (ECB) in Frankfurt January 24, 2012. REUTERS

The euro traded higher against the US dollar and the British pound Friday ahead of the eurozone finance ministers’ two-day meeting, where the leaders are likely to boost the rescue funds for the region.

EUR/USD was up 0.30 percent to trade at 1.3342 during early European trading session, while EUR/GBP gained slightly by 0.05 percent to hit 0.8340.

Eurozone leaders are expected to increase the firepower of the European stability funds to around 800 billion euros at the two-day meeting Copenhagen starting Friday. The leaders are anticipated to strike a balance in raising the funds amid growing international demand to increase the size and opposition from the donor countries such as Germany.

Angelo Gurria, the head of the Organization for Economic Cooperation and Development (OECD), said on Tuesday that eurozone finance ministers should need to boost the firepower of the European stability funds to at least one trillion euros ($1.3 trillion).

“The current level of commitment to the rescue funds is not enough to restore market confidence,” said Gurria.

However, risks to the single currency are likely to persist despite the increase in the size of the protective firewalls for the region, as the market focus turns to Spain and Italy, the countries which are mostly likely to ask for a bailout.

“After a period of ‘market fatigue’ with sovereign debt issues, we think the renewed deterioration within the euro area’s periphery is likely to refocus investors’ attention on currency risks. With a Negative short-term outlook, we think the euro (EUR) is likely to broadly underperform, as the region’s growth prospects falter,” said a note from Standard Chartered.

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