The euro rallied after Abu Dhabi pledged to bail out Dubai, easing concern that Europe’s biggest banks will suffer writedowns on loans in the Persian Gulf emirate.

The European currency rose most against the Taiwanese and Canadian dollars, while the pound pared its declines as stocks rebounded after Dubai said it will use some of the funds to pay “trade creditors and contractors as well as meet interest expenses and company working capital.” The yen gained against all 16 most-traded currencies tracked by Bloomberg after Japan’s Tankan index of manufacturer confidence beat forecasts.
“The all-dominating news is Abu Dhabi bailing out Dubai and it has added to the risk-on sentiment for now, sending euro- dollar higher,” Kasper Kirkegaard, a currency analyst with Danske Bank A/S, said in an interview with Bloomberg Television from Copenhagen.
The euro climbed to $1.4632 as of 7:03 a.m. in New York, from $1.4615 last week, when it declined to $1.4586, the weakest level since Oct. 5.
The 16-nation currency traded at 129.56 yen, from 130.24 yen, after dropping as low as 129.18 yen earlier. The yen was at 88.55 per dollar, from 89.10.
The MSCI World Index of shares advanced 0.2 percent, reversing a 0.1 percent decline, after the Dubai government said Abu Dhabi provided $10 billion to help state-owned Dubai World meet its obligations, including $4.1 billion needed to repay an Islamic bond maturing today for the real-estate unit Nakheel PJSC. Nakheel accumulated debt during a six-year real-estate boom in Dubai, when the sheikhdom borrowed $10 billion and its state-controlled companies a further $70 billion.
-----------Pound rebounds
The pound pared declines versus the dollar, trading at $1.6229, from $1.6262 last week and as low as $1.6190 earlier.
Royal Bank of Scotland Group Plc was the biggest underwriter of loans to Dubai World, according to JPMorgan Chase & Co. British banks, including RBS and HSBC Holdings Plc arranged about $4.4 billion of Dubai World’s loans, according to a report by Bank of America Merrill Lynch.
“It does remove a layer of uncertainty in the market but that doesn’t mean we’re out of the woods yet,” said Geoffrey Yu, a London-based currency strategist at UBS AG.
Gains in the euro were tempered on speculation the credit ratings of European nations will come under pressure.
Spain had the outlook on its AA+ debt rating cut to “negative” from “stable” by Standard & Poor’s 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.
-----------Greece reforms
Greek Prime Minister George Papandreou will Monday outline structural reforms aimed at cutting his nation’s budget deficit. European Central Bank Vice President Lucas Papademos said last week Greece’s fiscal situation was “extremely serious.”
“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 note Monday.
Industrial production in the 16 nations using the euro retreated 0.6 percent in October following a revised 0.2 percent increase the previous month, the European Union’s statistics office in Luxembourg said Monday. Economists in a Bloomberg survey forecast a reading of negative 0.7 percent.
-------------ZEW report
The ZEW Center for European Economic Research in Mannheim will say tomorrow its index of investor and analyst expectations, which aims to predict developments six months ahead, fell to 50.0 from 51.1 in November, according to 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 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.
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 unemployment unexpectedly fell, prompting traders to bet that the Federal Reserve will bring forward interest-rate increases.
----------Dollar and data
“Why is good data suddenly supporting the dollar?” a team of analysts led by Ulrich Leuchtmann at Commerzbank AG in Frankfurt wrote Monday. “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.”
The yen advanced most against the Taiwanese and Canadian dollars after the Tankan report, rising 1.1 percent against both. The index of sentiment among big makers of products including cars and electronics climbed nine points to minus 24 in December, the Bank of Japan said in Tokyo Monday. The median forecast of 19 economists surveyed by Bloomberg News was minus 27. A negative number means pessimists outnumber optimists.
(Source: Bloomberg)