By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — The U.S. dollar fell versus most major rivals as the euro mounted a cautious rally amid continued uncertainty over policy makers’ ability to respond to the threat of a Greek default and the potential impact on the global financial system.
The euro EURUSD +0.3569% traded at $1.3620 versus the dollar, up slightly from $1.3607 in North American trade late Tuesday.
The euro extended a gain after the European Commission announced that a review team from the troika of Greece’s international lenders — the European Union, the European Central Bank, and International Monetary Fund — will return to Greece Thursday. Read Market Pulse about troika’s return to Greece.
The commission also said euro-zone finance ministers would hold an extra meeting in October to discuss the situation in Greece and the possible disbursement of the next round of aid for the country if the review team makes a positive assessment of Greece’s compliance with the terms of last year’s bailout.
Also, Finland’s parliament passed legislation authorizing changes to the euro-zone bailout fund, the European Financial Stability Facility. Read Market Pulse about Finnish EFSF vote.
Remarks by European Commission President Jose Manuel Barroso helped lift the shared currency. Barroso told the European Parliament in his annual state of the union speech that he trusted the European Central Bank would continue to support the stability of the euro area and called for increased integration of euro-zone economic policies. Read Market Pulse about Barroso.
Barroso said the Commission, which is the executive arm of the European Union, is considering a “wider guarantee” mechanism to help Greek banks lend again to the real economy. He also indicated that some form of euro-zone-wide bond could be introduced under current EU treaties.
“Markets would certainly be reassured if governments followed this route,” said Jane Foley, senior currency strategist at Rabobank in London. “That said, while [German Chancellor Angela] Merkel’s rhetoric has been particularly supportive of EMU [economic and monetary union] in recent days, the acceptance of euro bonds would be a U-turn for her.”
Barroso also outlined a proposal for a financial transactions tax, which hit bank shares but left the euro unfazed as the shared currency appeared to benefit from end-of-quarter rebalancing.
Boris Schlossberg, head of currency research at GFT, said some modest support was also provided by a report in France’s La Tribune newspaper outlining a “secret” German plan to rescue Greece by bundling Greek state assets into a special vehicle and then privatizing them. The report said the proceeds would be used to buy back Greek debt from the European Central Bank and European Financial Stability Facility.
For now, the market is taking the concept with a grain of salt as it watches more immediate developments, he said, but the report “has clearly stopped the downside momentum in the euro for the time being as traders await further action from euro-zone fiscal officials.”
The dollar index DXY -0.36% , which tracks the U.S. unit against a basket of six major rivals, traded at 77.389, down from 77.679 on Tuesday.
U.S. Federal Reserve Chairman Ben Bernanke is scheduled to give a speech in Cleveland at 5 p.m. Eastern.
The dollar dipped versus the Japanese currency USDJPY -0.49% to fetch 76.38 yen, down from ¥76.71 on Tuesday.
The British pound GBPUSD +0.13% traded at $1.5631 against the dollar, unchanged from Tuesday.
William L. Watts is a reporter for MarketWatch in Frankfurt.
