By William L. Watts and Michael Kitchen, MarketWatch
FRANKFURT (MarketWatch) — The euro lost ground Monday, giving back some of Friday’s big rally after Finland reportedly signaled it will block efforts to use the euro zone’s permanent rescue fund to buy distressed government debt.
The euro EURUSD -0.6021% fell to $1.2596 from its $1.2658 level in late North American trade Friday.
The end of last week saw the European currency soar on measures to stabilize Spanish and Italian borrowing costs and move the currency bloc toward a banking union.
The dollar index DXY +0.27% — a measure of the U.S. unit’s performance against six major currencies — rose to 81.824 from 81.658 Friday.
On Monday, Reuters said Finland indicated that it and the Netherlands would stand in the way of any effort to use the European Stability Mechanism to buy bonds on the secondary market. Read about Finland.
“While further details were not forthcoming, it provides further evidence of hostility from northern Europe, one of the key hurdles for major policy breakthroughs in the euro zone,” said Chris Walker, currency strategist at UBS, in a note. “After the impressive rally on Friday, the question now is to what extent those gains can be sustained, and for how long.”
The euro surged more than 2% on Friday after European leaders indicated they would loosen rules to allow the rescue funds to purchase distressed bonds without requiring governments to submit to full bailout procedures. They also agreed to allow the ESM to directly recapitalize banks once a single, region-wide bank supervisor is in place, a move that would take the cost of Spain’s bank bailout off the government’s books. Read more on Friday’s currency action.
Walker said the scope for a sharp correction lower appeared limited with U.S. markets scheduled to close Wednesday for the Independence Day holiday and traders looking ahead to a European Central Bank rate decision on Thursday and U.S. nonfarm payrolls for June on Friday.
On the economic front, the Markit June purchasing managers’ index for the euro-zone manufacturing sector came in at 45.1, unchanged from the nearly three-year low set in May but up from an initial reading of 44.8. A reading of less than 50 indicates a contraction in activity.
The euro-zone unemployment rate rose to a record 11.1% in May from 11% in April, Eurostat reported. The figure matched expectations.
The ECB is expected to cut in its benchmark rate by a quarter-point to 0.75%. Read about expectations for the ECB and Bank of England..
The Japanese yen strengthened after the Bank of Japan’s quarterly tankan survey showed improved business sentiment in the April-June quarter.
The dollar USDJPY -0.1310% fell to ÂĄ79.80, down from ÂĄ79.92 late Friday.
The British pound GBPUSD +0.0239% saw less movement, trading at $1.5705 compared with $1.5677, ahead of the Bank of England decision, also due Thursday.
William L. Watts is MarketWatch's European bureau chief, based in Frankfurt.
Michael Kitchen is Asia editor for MarketWatch and is based in Los Angeles.
