Earlier today the Euro had bounced off of a three week low against the U.S. Dollar. This was as a result of short-covering ahead of the European Union summit starting later in the day and on heightened expectations of more monetary intervention from the European Central Bank (ECB).
Most analysts expect the European leaders to struggle to agree on necessary steps to solve the region's debt crisis during the two day summit, however there is an element, among some market players, that are looking at playing it safe by squaring their positions in the event of there being a surprise breakthrough.
The EU leaders appear more divided than at any time since 2010, when the debt crisis erupted in Greece and then spread over the Euro zone. They are due to discuss a plan for closer European integration at the summit.
German Chancellor, Angela Merkel, has been especially reluctant to heed calls from Spain and Italy, who are advocating emergency action in order to lower their rapidly rising borrowing costs, and she has shunnedthe idea of joint Euro zone debt.
The Euro rose 0.35% to $1.2511, having recoveredfurther from the three-week low of $1.24413 hitearlier in the week.
Now economists have heightened expectations that theEuropean Central Bank will take some measures in theweek to come.
Market players are increasingly betting that the ECB will intervene either by cutting rates or by announcing large long-term fund injections, after its policymeeting to be held in the new week. This is especially so after data released yesterday had shown that German inflation has eased to an 18 month low.
Just a few hours before the summit is set to start today, Italy will hold an auction of up to 5.5 billion Euro bonds and its borrowing costs are expected to rise above 6%. The 185-day bills sold yesterday achieved arate of 2.957%, while the zero-coupon, two year notes offered on June 26th yielded 4.712%, both being thehighest this year.
In contrast to a gloomy outlook over the Euro,U.S. economic data released yesterday was more upbeatwith durable goods orders and pending home sales both beating market expectations. This helped to boost risksentiment in the broader financial markets.
As a result, the Australian Dollar was lifted around0.3% earlier today to a one-week high of $1.0121 anda four month high against the Euro at A$1.2331.
The U.S. Dollar weakened against most of its majorcounterparts and was down 0.4% to the Yen at79.40 Yen, mainly due to month end selling byJapanese exporters.
Since the end of March, the Euro has dropped 10% tothe Yen and 6.2% against the Dollar. So far the Dollar has climbed 3.6% in 2012 versus the Euro and 3.3%against the Yen