By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — The euro soared versus the U.S. dollar and other major currencies Friday after European Union leaders agreed in a closely watched summit meeting to measures aimed at stabilizing Spanish and Italian bond markets and took steps toward establishing a euro-zone-wide banking union.
The euro EURUSD +1.12% traded at $1.2569 versus the dollar versus $1.2429 in North American trade late Thursday. The shared currency soared as high as $1.2627 in the wake of the summit announcements. The euro is on track for a 1.7% monthly rise versus the dollar but is set to end the second quarter with a 5.7% fall.
European leaders agreed to allow the region’s permanent rescue fund, the European Stability Mechanism, or ESM, provide cash directly to Spanish banks once a regionwide financial supervisor is established. That would allow Spain’s government not to take the cost of the bailout onto its books.
Also, loans provided to Spain by the region’s rescue funds won’t carry senior status, potentially reassuring other creditors. Leaders also agreed to allow the rescue funds to buy distressed government bonds without requiring countries to sign on to strictly monitored bailout programs, opening the door for purchases of Italian bonds.
Spanish and Italian bonds rallied, knocking yields down sharply. European leaders take aim at Spanish, Italian borrowing costs
Strategists noted, however, that previous postsummit rallies by the euro and other risk assets have often proved to be short-lived affairs. Economists said concerns remain about the ability of the announced measures to provide lasting reassurance to investors.
“It needs to be remembered that the agreement reached doesn't address the structural issues within the euro area that created the crisis in the first place. Instead, it simply shifts the burden of the outcome — for those nations where private sector borrowing was the issue — from the local sovereign to the bailout funds, which, in reality, means the nations of Northern Europe — principally Germany,” wrote Simon Derrick, senior currency strategist at Bank of New York Mellon in London.
Daragh Maher, currency strategist at HSBC, said the durability of the euro’s rebound will likely be dictated by bond markets.
If yield spreads between peripheral and German government bonds “narrow in a sizable and sustained way, FX may be more confident about the rally. If the rally fades, euro bears will be energized by the failure of the euro to hold its gains even after demonstrably good news,” he said.
The revived risk appetite in the wake of the summit announcements undercut the U.S. dollar’s safe-haven appeal. The dollar index DXY -0.78% , which measures the U.S. unit against a basket of major rivals, traded at 82.040 versus 82.793 in North American trade late Thursday.
The dollar index is set to end June with a 1.2% monthly fall but is up 3.8% since the start of the second quarter.
The British pound GBPUSD +0.50% traded at $1.5611 versus the dollar, up from $1.5498. The dollar fetched 79.41 Japanese yen USDJPY +0.06% , little changed from Thursday.
William L. Watts is MarketWatch's European bureau chief, based in Frankfurt.
