Markets: News  

Dollar gains as hopes fade for EU summit

NEW YORK (MarketWatch) -- The dollar advanced against major currencies Wednesday, gaining against the euro as comments by European Union leaders dashed hopes that their upcoming summit will yield solutions to the region's debt crisis.

The dollar index (DXY) , which measures the U.S. unit against a basket of six currencies, rose to 82.585 from 82.365 late Tuesday.

The euro (EURUSD) slipped to $1.2465 from $1.2499 in late North American trading Tuesday. It traded as low as $1.2451 earlier.

The EU's two-day meeting starts Thursday and is expected to focus on the region's long-running debt crisis.

A draft document from the EU on Thursday emphasized forming a banking union, and possibly a regional bank supervisor, but it had little teeth in regard to more tightly coordinated budget policies and fiscal rules. Read more on Europe's plan for fiscal union.

Even less likely to gain any traction is the idea of some form of jointly-backed debt, like a euro bond, which German Chancellor Angela Merkel had clearly voiced opposition to. France and other euro-zone countries favor a move toward mutualization of euro-zone debt or other steps to ease borrowing costs for the likes of Spain and Italy.

David Song, currency analyst at DailyFX, also noted "recent remarks by German Finance Minister Wolfgang Schaeuble suggest that the sharing of liability must be accompanied by a transfer of power."

To Song, "it seems as though hopes surrounding the EU summit are quickly abating, and we may see the euro come under increased pressure over the remainder of the week should the meeting disappoint."

Over the longer term, the most likely scenario is that Europeans "muddle through, have a credit crunch but not a crisis," accompanied by further interest-rate cuts from the European Central Bank, said Michelle Meyer, senior U.S. economist at Bank of America Merrill Lynch.

The worst-case scenario would unfold "if policy makers are unable to stem the contagion, which would be very bad for the global economy," she said.

That would include a more tangible fear that the euro zone could break apart. Meyer thinks this less likely a possibility, however.

Data on durables and home sales

Also affecting foreign-exchange trading Wednesday were U.S. economic data.

The dollar edged up after a report showed orders for durable goods rose a better-than-expected 1.1% in May, which U.S. equity futures initially reacted negatively to. See story on durable-goods orders.

This growth suggests capital-investment intentions improved, said Millan Mulraine, senior U.S. strategist at TD Securities. "However, with global and domestic demand continuing to weaken, we believe that this relatively brisk pace of new orders activity is unlikely to be sustained, and expect the pace of activity to be tepid in the coming months," he added.

Separately, pending home sales climbed in May to their highest level in two years. Read more on pending home sales.

Also Wednesday, the British pound (GBPUSD) fetched $1.5565, down from $1.5647.

Against the Japanese yen, the dollar (USDJPY) rose to buy ¥79.75, up from ¥79.48 late Tuesday.

The euro (EURJPY) bought ¥99.41, up from ¥99.26 late Tuesday.

With the euro remaining below ¥100, "that explains a lot of the reason why [the dollar index] is hanging tough despite some money flows into commodities and equities," said Richard Hastings, macro strategist at Global Hunter Securities.

There's a limited impact from economic fundamentals "because of the weaker euro, which represents a big chunk of [the index's] composition," he said.

It would take a stronger euro paired with better fundamentals to undercut the dollar index and push it below 81 at this time, according to Hastings.