The euro snapped two days of declines against the dollar as gains in European stocks boosted sentiment toward the currency on signs that talks aimed at staving off a Greek debt default were making progress. The 17-nation currency erased a drop against the yen as Greece resumed talks with creditors as well as European Union and International Monetary Fund officials. Greece’s Finance Ministry described the talks with the EU and IMF as “productive and substantive” yesterday. The dollar was little changed before the Federal Reserve begins a two-day policy meeting today. South Korea’s won fell to its weakest levels this year as Asian stocks fell. “There’s a sense that there have been some positive aspects to the talks, which has helped the euro,” said Michael Derks, the chief strategist at foreign-exchange broker FxPro in London. “More positive sentiment in the stock market helps.” The euro strengthened 0.1 percent to $1.3705 at 8:32 a.m. in New York, after falling as much as 0.7 percent to $1.3594. The shared currency rose 0.2 percent to 104.98 yen, after reaching 103.99 yen, within 0.09 yen of the least since 2001. The dollar was little changed at 76.58 yen. Europe’s benchmark Stoxx 600 Index advanced as much as 1.6 percent as speculation the Greek talks would yield a solution to the nation’s debt woes eased concern that the region’s debt crisis is worsening. U.S. stock-index futures also climbed on bets the Federal Reserve will provide more stimulus for the economy, outweighing Italy’s credit-rating downgrade. Rate Cut “European stocks are a touch up; these days when it’s not downright negative it’s seen as positive,” said Geoff Kendrick, head of European currency strategy at Nomura International Plc in London. “The trend is still down for the euro. We’re predicting $1.30 for the euro by year-end and that seems to be where it’s heading.” Standard & Poor’s cut its credit rating for Italy, which has Europe’s second-largest debt load, to A from A+ yesterday. The firm said Italy’s net general government debt is the highest among A rated sovereigns, and now expects it to peak later and at a higher level than it previously anticipated. Italy follows Spain, Ireland, Portugal, Cyprus and Greece as euro-region countries having their credit ratings cut this year. The European Central Bank last month started buying Italian and Spanish government bonds after the region’s debt crisis pushed their yields to euro-era records. Default Risk “Investors are still pricing in the possibility of a Greek default and that’s weighing on the euro, particularly against the dollar and yen, which seem to be benefiting in this environment,” said Chris Walker, a foreign-exchange strategist at UBS AG in London. “The crisis in Europe is going to get worse before it gets better so we would recommend selling the euro at these levels. We think it’ll go to $1.30 by year-end.” Greek Prime Minister George Papandreou’s government will hold another call with EU and IMF officials tonight in a bid to secure a sixth installment of rescue funds, amid concern the austerity measures demanded are deepening a three-year recession and making it harder for the government to meet its deficit goals. Papandreou is considering holding a referendum on whether his nation should remain in the common currency, the Kathimerini newspaper said, citing people it didn’t name. Greek government spokesman Ilias Mosialos denied the report. “There’s a lot of event risk for the euro and it should stay weaker over the next few weeks,” said Lutz Karpowitz, a senior currency strategist at Commerzbank AG in Frankfurt. “The euro at current levels is probably quite a bit higher than what the market sees as fair value.” Fed Meeting Fed policy makers may decide to replace some of the short- term Treasuries in the Fed’s $1.65 trillion portfolio with longer-maturity debt in a bid to lower borrowing costs, according to economists at Wells Fargo & Co., Barclays Plc and Goldman Sachs Group Inc. The euro pared declines against the dollar after data showed Germany’s investor confidence fell less than economists expected this month. The ZEW Center for European Economic Research in Mannheim said its index of investor and analyst expectations, which aims to predict developments six months in advance, declined to minus 43.3 in September from minus 37.6 last month, the lowest since December 2008. Economists expected a drop to minus 45, according to the median estimate in a Bloomberg survey. The yen strengthened against most of its 16 major peers. Japan’s trade minister Yukio Edano said the country will deal with any speculative currency moves. South Korea’s won and Malaysia’s ringgit reached 2011 lows as the European debt crisis damped demand for higher-yield currencies. The won dropped 1 percent to 1,1148.90 per dollar after earlier touching 1,156.50, the weakest since Dec. 22, according to data compiled by Bloomberg. Malaysia’s ringgit retreated 0.2 percent to 3.1227 per dollar. It earlier reached 3.1412, the weakest since Dec. 21. To contact the reporters on this story: Garth Theunissen in London gtheunissen@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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