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Euro jumps most since October on EU moves

SAN FRANCISCO (MarketWatch) -- The euro soared on Friday versus the U.S. dollar by the most since October after European Union leaders agreed to measures aimed at stabilizing Spanish and Italian bond markets and took steps toward establishing a euro-zone-wide banking union.

The euro (EURUSD) jumped to $1.2658 from $1.2429 in North American trade late Thursday. It's the largest one-day percentage gain since October.

The euro rose 2.4% monthly versus the dollar this month but is still down 5.1% for the second quarter.

The EU news has "given the euro a nice boost," said Jason Schenker, president of Prestige Economics.

"How much more of a boost is tough to call," he said in a note. "After all, the implementation of [the decision] is urged by the end of 2012, which is some time over the next six months. Plenty can go wrong in such a large window."

For now, the revived risk appetite in the wake of the EU summit announcements undercut the U.S. dollar's safe-haven appeal. Read more about the EU summit decisions.

The dollar index (DXY) , which measures the U.S. unit against a basket of major currencies, fell to 81.658 from 82.793 in North American trade late Thursday.

The index lost 1.7% in June, but is up 3.6% since the start of the second quarter.

"If the EU's efforts can level off the global markets, the dollar will be hurt for it," said John Kicklighter, currency strategist for DailyFX. "Then again, if skepticism comes back with a vengeance, the greenback will be leading the way higher for safe havens."

European progress

European leaders agreed to allow the region's permanent rescue fund, the European Stability Mechanism, or ESM, to provide cash directly to Spanish banks once a region-wide financial supervisor is established. That would allow Spain's government not to take the cost of the bailout onto its books.

"On the edges of abyss, the EU managed to do enough to take a good long step back," said Sebastien Galy, foreign-exchange strategist at Société Générale. "The risk of contagion is now dropping severely for the next few weeks."

What's important going forward, however, is the market's assessment as to whether the EU's "short-term crisis tools are influential enough to redirect a natural bearish inclination building across the global markets away from European sovereign and bank assets," said Kicklighter.

Leaders also agreed to adjustments in bondholders' pecking order and easing requirements before the region's bailout fund buys distressed debt. Spanish and Italian bonds rallied, knocking yields down sharply.

Many analysts still predict the euro will fall towards $1.20 in coming months.

Strategists noted, however, that previous post-summit rallies by the euro and other risk assets have often proved to be short-lived. Concerns remain about the ability of the announced measures to provide lasting reassurance to investors.

"The agreement reached doesn't address the structural issues within the euro area that created the crisis in the first place," wrote Simon Derrick, senior currency strategist at Bank of New York Mellon in London.

"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," he added.

Against that backdrop, the British pound (GBPUSD) traded at $1.5677, up from $1.5498 Thursday.

The dollar fetched 79.92 Japanese yen (USDJPY) , up from ¥79.42 Thursday.

U.S. economic data on consumer spending, manufacturing and confidence released Friday did little to sway trading in the greenback. Read more on consumer spending. see story on sentiment.