Euro up 2nd day on crisis hopes but caution abounds

NEW YORK (Nov 29): The euro rose against the dollar for a second straight session on Tuesday in cautious trade on talk the European Central Bank could lend money to the International Monetary Fund to help stem the debt crisis.

The euro zone is discussing the option of financing emergency help for Italy or Spain by using money from national central banks to boost International Monetary Fund resources - but only as a last resort, euro zone officials said.

Euro zone ministers struggled to ramp up the firepower of their rescue fund and raised the possibility of asking the IMF for more help on Tuesday after Italy's borrowing costs hit a euro lifetime high of nearly 8 percent.

Talk of an ECB/IMF deal implies that the Europeans are really having trouble coming up with any new schemes to stabilize the region, according to Kathy Lien, director of currency research at GFT Forex in Jersey City, New Jersey.

"The rally in the euro today was sparked by what would normally be extremely negative news for the currency."

While Italy successfully sold 3-year and 10-year bonds it had to pay yields at levels that most said are too burdensome. Indeed, yields were above levels at which Greece, Ireland and Portugal were forced to apply for international bailouts.

Italy has had preliminary discussions with the International Monetary Fund about financial support to cope with the euro zone's debt crisis, possibly co-funded by national ECB banks, but no decision has been taken, several sources close to the situation said.

"Also, as we have warned, rating agencies are becoming aggressive making further downgrades the greatest risk for the euro," Lien said.

A report in business daily La Tribune said that ratings agency Standard & Poor's would lower its outlook on France's AAA credit rating to negative within 10 days.

In late afternoon New York trade, the euro was up 0.1 percent at $1.3328, after earlier rising nearly 1 percent to a session high of $1.3442, initially on hedge fund buying.

Euro zone finance ministers agreed on Tuesday to release aid payment for debt-burdended Greece, an EU diplomat said.

The ECB, meanwhile, failed to attract enough deposits from banks that would neutralize its purchases of bonds from debt-ridden euro zone countries, which investors took to mean that the central bank had effectively launched a round of quantitative easing because it increased the amount of euros in the market.

Marc Chandler, global head of FX strategy at Brown Brothers Harriman, was among analysts who believed that it was not quantitative easing at all, adding that the imbalance must occur on a continued basis to be considered monetary easing.

"It could be a host of other factors," said Chandler. "It could be the low yield as one reason why the ECB failed to attract deposits or it could be the tenor of those deposits. So we should reserve judgment until next week."

Germany and France are reported to be aiming to outline proposals for a fiscal union before a European Union summit on December 9. A growing number of investors see a fiscal union as perhaps the last chance to avert a breakdown of the common currency area.

A rebound in U.S. consumer confidence in November spurred investors' appetite for risk, boosting the Australian, Canadian, and New Zealand dollars as well as the euro.

Risk appetite may gain ground later this week when the U.S. Labor Department reports November nonfarm payrolls data.

U.S. companies probably stepped up hiring in November, which could add to expectations of stronger economic growth in the fourth quarter.

Against a currency basket .DXY the dollar fell 0.4 percent to 78.984. The dollar fell 0.2 percent against the yen at 77.84.