Euro May Extend Gain From Two-Month Low on Dubai Bailout Pledge

The euro may rise for a second day against the dollar after Abu Dhabi pledged to bail out Dubai World, easing concern Europe’s biggest banks will be forced to write down loans to the state-owned holding company.

It’s “a relief rally,” said George Davis, chief technical analyst for fixed-income and currency strategy at RBC Capital Markets in Toronto. “Dubai’s problems been alleviated for the next few months, and that’s put the market on firmer footing.”

The yen gained yesterday against most of the major currencies tracked by Bloomberg after Japan’s Tankan index of manufacturer confidence exceeded the forecasts of economists. Mexico’s peso briefly pared its advance against the dollar after Standard & Poor’s cut the nation’s credit ratings.

The euro traded at $1.4660 at 7:01 a.m. in Tokyo, after gaining 0.3 percent yesterday. It fell on Dec. 11 to $1.4586, the lowest level since Oct. 5. The euro was at 129.95 yen, following a 0.3 percent decrease yesterday. The dollar fetched 88.63 yen, after sliding 0.5 percent.

Mexico’s peso appreciated 1.1 percent to 12.7451 versus the dollar on speculation the Dubai bailout will spur demand for higher-yielding assets.

The currency pared its gain for about 10 minutes yesterday after S&P lowered Mexico’s foreign-currency debt rating to BBB, the second-lowest investment grade, from BBB+. The outlook on the rating is stable. The country received its investment-grade rating from S&P in February 2002.

Stock Gains

The Standard & Poor’s 500 Index rose for a fourth day yesterday, increasing 0.7 percent after the Dubai government said Abu Dhabi provided $10 billion to help Dubai World meet its obligations.

The yen advanced yesterday versus the dollar for the first time in three days as the Tankan index of sentiment among big makers of products including cars and electronics climbed 9 points to minus 24 in December, the Bank of Japan said in Tokyo. The median forecast of 19 economists in a Bloomberg survey was for a reading of minus 27. A negative number means pessimists outnumber optimists.

Japan’s currency is poised to replace the dollar as the top funding currency for investments in cities from Sydney to Sao Paulo after borrowing from Japan became almost as cheap as U.S. loans for the first time in four months. Rates on 90-day yen loans between banks have fallen the most in 13 years as record deflation prompted the Bank of Japan to start a $113 billion lending program last week.

Outlook for Euro

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.

Spain saw the outlook on its AA+ debt rating cut to “negative” from “stable” by S&P 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.

Greek Prime Minister George Papandreou yesterday pledged “radical” action to tackle the country’s budget deficit as officials struggle to convince investors they can get a grip on public finances.

“Dollar strengthening may extend somewhat further against the euro as concerns over fiscal solvency in some euro-zone member countries dominate market focus,” Michael Hart, a currency strategist at Citigroup Inc. in New York, wrote in a research note.

European Output

Industrial production in the nations using the euro retreated 0.6 percent in October following a revised 0.2 percent increase in the previous month, the European Union’s statistics office said yesterday in Luxembourg. Economists in a Bloomberg survey forecast a reading of negative 0.7 percent.

The ZEW Center for European Economic Research in Mannheim will say today its index of German investor and analyst expectations, which aims to predict developments six months ahead, fell to 50.0 from 51.1 in November, according to the median forecast in 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 dollar has risen against the euro since a Dec. 4 report showed that U.S. employers cut the fewest jobs in November since the recession began and the unemployment rate unexpectedly fell to 10 percent.

‘Good Data’

“Why is good data suddenly supporting the dollar?” a team of analysts led by Ulrich Leuchtmann at Commerzbank AG in Frankfurt wrote yesterday. “This development makes sense if one relies on good U.S. data eventually leading to an end of the Fed’s zero rate policy. Previously rate rises had moved into the very distant future so that the effect had been ignored. This is obviously changing now.”

Futures on the Chicago Board of Trade indicated a 47 percent chance the Federal Reserve will raise the target lending rate by at least a quarter-percentage point by its June meeting. The odds were 44 percent a month ago. The central bank is next scheduled to decide on borrowing costs at its two-day meeting starting today.