LONDON—The euro enjoyed a bounce in European trade Monday as traders reversed negative bets and expressed some relief that the Belgium government had sold all its bonds at an auction after its credit rating was downgraded before the weekend.
The euro was recently trading higher at $1.3378 compared with $1.3246 late Friday in New York, and at ¥103.88 from ¥102.89. The dollar traded at 0.9194 Swiss francs from 0.9315 francs, and at ¥77.69 from ¥77.76.
The euro's rebound was helped by speculation over the weekend that the International Monetary Fund was in talks with Italy to secure a potential bailout package and that Germany and France were close to agreeing a deal that would make budget discipline legally enforceable in euro-zone countries.
The IMF denied the rumors, while Germany said there were no plans to issue a common bond with other triple-A-rated euro-zone countries to stabilize their credit rating and create a firewall to protect the euro zone and its currency. The early rally nonetheless prompted investors to scramble to liquidate some of their so-called short positions—namely their bets against the euro.
The bounce in the euro, and in the Australian and New Zealand dollars, came as the risk-premium investors attached to peripheral euro-zone government bonds fell compared with safe-haven German bunds. Even so, borrowing costs for some euro-zone countries remained near euro-era highs, with yields on ten-year Italian bonds still trading above 7% and underlying demand for the euro wilting.
"We note that the traditional sellers of the euro against the dollar—asset managers—show no sign of changing direction," UBS said in a note to clients.
Belgium sold a total of €2 billion of bonds at auction, as planned, despite worries that the newly downgraded papers would garner limited interest ahead of a busy euro-zone debt auction schedule and amid a deteriorating economic backdrop.
Reinforcing the negative growth outlook in major economies, the Organization for Economic Cooperation and Development said the euro zone has fallen into a recession.
The euro shrugged off the growth concerns and sterling was unaffected by data showing that sales volumes in the country have slumped to their lowest level since March 2009. Emerging market currencies were steady, following the more positive tone in the euro.
