Dec. 5 (Bloomberg) -- The euro advanced, extending last week's gains versus the dollar and yen, as Italy's cabinet approved a deficit-cut plan before a European summit on the region's sovereign-debt crisis. The 17-nation currency appreciated as the German government won't stand in the way of the Bundesbank channeling funds to the International Monetary Fund, according to a senior aide to Chancellor Angela Merkel. The yen and dollar weakened as stocks advanced, damping demand for safer investments. The franc fell for a fourth day amid speculation that the nation's central bank may lower the ceiling on the currency's exchange rate. "The euro is benefiting from a general bid for risk," said Adam Cole, global head of foreign-exchange strategy at RBC Europe Ltd. in London. "The news from Italy helped with the positively received budget package and austerity measures. The euro feels slightly better bid." The euro rose 0.4 percent to $1.3441 at 8:34 a.m. New York time after gaining 1.2 percent last week. The shared currency climbed 0.4 percent to 104.84 yen. The dollar was little changed at 77.99 yen. German Chancellor Angela Merkel is scheduled to meet French President Nicolas Sarkozy today to work on a plan for stricter enforcement of the region's deficit rules. European Union leaders will hold a summit in Brussels Dec. 9. Monti Plan Italian Prime Minister Mario Monti announced 30 billion euros ($40.3 billion) of austerity and growth measures yesterday. The premier will present the package, which includes a tax on luxury goods, resurrects a property levy on first homes, and forces many workers to delay retirement. At a Nov. 29 meeting attended by European Central Bank President Mario Draghi, euro-area finance ministers gave their approval for work on a plan to recycle national central bank funds through the IMF, said two people who declined to be named because the talks are at an early stage. The funds may be used to underwrite precautionary lending programs for Italy or Spain, the people said. "Policy makers working together rather than working against each other," may underpin the euro, said RBC's Cole. "This may be a positive development" for the common currency." Standard & Poor's 500 Index futures expiring in December gained 1.4 percent and the S&P GSCI Index of 24 raw materials rose 0.8 percent. Yen Weakens The yen fell 0.4 percent against nine developed nation currencies, according to Bloomberg Correlation-Weighted Indexes. The dollar declined 0.4 percent. The Dollar Index fell 0.3 percent to 78.421 before a report that may show service industries in the U.S. probably grew in November at the fastest pace in six months. The gauge, which tracks the greenback against six major trading partners, is weighted 57.6 percent to the euro. At its meeting on Dec. 8, the ECB will cut its benchmark interest rate to 1 percent from 1.25 percent, according to the median estimate of economists surveyed by Bloomberg News. A rate cut "would likely spark a rally in the euro first as investors reward the central bank for taking a proactive stance," Mansoor Mohi-uddin, Singapore-based head of foreign exchange strategy at UBS AG, wrote in a note to clients. Euro Forecast The euro will then decline as investors weigh further ECB action as the euro-area economy deteriorates, he wrote. UBS forecasts the currency will drop toward $1.20 next year. Bank of Canada Governor Mark Carney will be the only central bank leader in the Group of 10 countries to raise interest rates next year, according to forecasts compiled by Bloomberg News. Inflation has exceeded the bank's 2 percent target for 11 months as the economy grows at double the pace of the Group of Seven nations. Canada's dollar rose 0.5 percent to C$1.0143 per U.S. dollar and gained 0.5 percent to 76.89 yen. The currency is turning into a haven for foreign-exchange investors shunning European turmoil and seeking the safety of the U.S. without the budget deficits or political gridlock. Mexico's peso was the best performer against the dollar after the nation's central bank started to auction $400 million of reserves last week. The move was to provide liquidity and arrest a slide in the currency, that's made it the worst performer in Latin America this year, according to an e-mailed statement from the nation's Currency Exchange Commission on Nov. 29. The peso rose 1.2 percent to 13.4775 per dollar. The Swiss government said last week it is willing to "examine the feasibility of supporting measures," including negative interest rates, to aid the central bank in its defense of a 1.20 ceiling versus the 17-nation currency. The franc depreciated 0.3 percent to 1.2375 per euro and was little changed at 92.07 centimes per dollar.

Source