The euro advanced for a second day versus the dollar as reports that France and Germany are nearing a deal to boost the size of Europe’s rescue fund to contain the debt crisis spurred demand for the region’s assets. The shared currency strengthened against all except two of its 16 major peers as the Guardian newspaper reported the two nations support increasing the 440-billion euro ($607 billion) European Financial Stability Facility to 2 trillion euros before a summit this weekend. The dollar, yen and Swiss franc declined as stocks advanced. South Korea’s won rose to the strongest in a month after a currency-swap accord with Japan was increased. “A lot of people seem to think that leveraging the EFSF might work as a solution to the crisis, and that this might be the proposal presented at the weekend,” said Lutz Karpowitz, a senior currency strategist at Commerzbank AG in Frankfurt. “That’s what is supporting the euro. We are pessimistic that this would really be a viable solution to the crisis.” The euro gained 0.4 percent to $1.3802 at 9:31 a.m. London time, after rising 0.1 percent yesterday. The currency appreciated 0.4 percent to 106.03 yen, and rose 0.7 percent to 1.2442 francs. The yen was little changed at 76.81 per dollar. The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, dropped 0.3 percent to 76.885. The Stoxx Europe 600 Index advanced 0.3 percent and the MSCI Asia Pacific Index climbed 0.7 percent, sapping demand for investments perceived to be havens. Fund Firepower German Finance Minister Wolfgang Schaeuble told lawmakers in Berlin that the firepower of the European Financial Stability Facility may be increased to a maximum of 1 trillion euro through an insurance model, Financial Times Deutschland reported, without saying where it obtained the information. Germany and France also support recapitalization of the region’s banks, the Guardian reported. A spokesman for German Chancellor Angela Merkel declined to comment. Merkel said yesterday the EU summit will mark an important step, though not the final one, in solving the debt crisis. “The euro is supported in part because what European leaders are doing is right, though progress has been slow,” said Kengo Suzuki, a bond-department manager at Mizuho Securities Co. in Tokyo. The euro advanced even after Moody’s Investors Service cut Spain’s credit ranking yesterday by two levels to A1 from Aa2. The company cited the “continued vulnerability of Spain to market stress” that is driving up the cost of borrowing, as well as weaker growth prospects. U.S. Inflation The dollar weakened against 12 of its 16 major counterparts before a U.S. report forecast to show the cost of living eased in September. Consumer prices climbed 0.3 percent, the smallest gain in three months, according to economists surveyed by Bloomberg News. Separate data may show homebuilding rebounded in September from the slowest pace since May. The yen depreciated 0.2 percent, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies, after the Nikkei newspaper reported Japan will take steps to tackle the currency’s appreciation. It has gained 11 percent over the past six months, the indexes show. Japan’s government and central bank will form a team of senior officials to address the strong yen, the Nikkei said. The opposition Liberal Democratic Party this month urged the government to step up currency-market intervention to counter the yen’s appreciation. Yen Strength The reported measures “don’t include anything that can correct the yen’s strength,” said Yuji Saito, director of the foreign-exchange department in Tokyo at Credit Agricole Corporate & Investment Bank. “Disappointment seems to be pushing exporters to sell dollar and buy yen.” Former Japanese Finance Ministry official Eisuke Sakakibara said the yen may strengthen past 100 per euro. Japan may intervene to weaken the yen, though such efforts will only be successful if coordinated with other nations, Sakakibara said in a conference in Tokyo. The won advanced after South Korean President Lee Myung Bak and Japanese Prime Minister Yoshihiko Noda agreed to increase a currency-swap accord by more than fivefold to $70 billion amid uncertainty over Europe’s fiscal crisis. The won climbed 1.2 percent to 1,132.30 per dollar. The currency touched 1,128.53, the strongest since Sept. 19. To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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