The euro rose on Tuesday after a British newspaper reported France and Germany have reached a deal to enlarge the eurozone bailout fund to two trillion euros in a bid to contain the region's debt crisis. The rescue fund, known as European Financial Stabilisation Facility (EFSF), is currently worth 440 billion euros.
The Guardian, citing senior European Union officials, said leaders of eurozone's two largest economies also agreed the region's banks should be recapitalized and private bondholders would take bigger haircut on their Greek debt holdings. The Guardian article, together with gains in the stock market, swept away earlier disappointment over weak data on German investor sentiment, and a rating agency's warning on France losing its top credit rating. "A report that France and Germany have agreed to a 2 trillion euro rescue fund and leveraging up the EFSF by five times is what's driving this stock and euro rally in the afternoon," said Brian Dolan, chief strategist at Forex.com in Bedminster, New Jersey.
The euro was last up 0.4 percent at $1.3792 after touching a session low of $1.36525 on trading platform EBS. The single currency climbed to a one-month high above $1.39 on Monday. But the euro could resume its losses, analysts said, if stories re-emerge ahead of this weekend's European Union summit that leaders could not produce a convincing strategy to tackle the region's sovereign woes.
"That would be what the market's been looking for, and 2 trillion euros seems to be in the right neighbourhood. But I have to take it with a grain of salt because (German Chancellor) Angela Merkel said earlier not to expect any big deal to come from the summit," Dolan said.
Earlier, Merkel said she expects European leaders would come up with a "work plan" for debt-laden Greece at the EU summit. Germany has been reluctant to back aggressive measures to contain the crisis due to worries that it has already overextended itself as its economy is slowing. The dollar dipped 0.04 percent to 76.76 yen. Moody's warned on Monday it may slap a negative outlook on France's Aaa credit rating in the next three months if the costs for helping to bail out banks and other eurozone members stretch its budget too much.