Euro slips as EU discusses bailout strategy

[January 17, 2011]  MILAN (AP) -- The euro currency was under pressure on Monday as European finance ministers disagreed over how to tackle the debt crisis, while stock markets struggled amid worries about Chinese growth.

The euro slipped to $1.3281 ahead of a key European finance ministers' meeting in Brussels. All eyes are on Germany, to see if Europe's largest economy and financier will resist boosting the size of the EU bailout fund.

"Indecision on the matter of the size of the fund will continue to dominate sentiment over the coming days," said Michael Hewson of CMS Markets.

Also weighing on the euro this week will be a confidence vote Tuesday of Irish Prime Minister Brian Cowen amid sharp criticism of his handling of Ireland's debt woes, which led to an expensive international rescue effort.

China's latest move to curb the flood of money to its economy, putting a lid on growth, continued to weigh on markets. Oil prices slipped to near $91 a barrel amid prospects for weaker demand for crude.

The FTSE 100 was down 0.26 percent at 6,001.81. Germany's DAX was down 0.07 percent to 7,070.92, while the CAC-40 in Paris dropped 0.38 percent to 3,968.08.

U.S. markets were closed for the Martin Luther King, Jr. holiday.

Germany's finance minister Wolfgang Schaeuble insisted Monday that bolstering the bailout fund so it can actually lend out the advertised euro750 billion ($1 trillion) -- which it currently cannot do due to technical reasons -- is as far as his country will go. Other countries had proposed to double its size.

The ministers will also debate whether to allow the fund to buy government bonds on the market, therefore giving it a more proactive approach to the crisis rather than just funding rescues once countries have no other option.

Although Europe's debt crisis eased somewhat last week with successful bond auctions, many experts still say Portugal will eventually need a bailout and governments are worried that the austerity measures needed to calm bond markets will cost them years of economic growth.

In Asia, the benchmark Shanghai Composite Index lost 3 percent to 2,706.66 and the Shenzhen Composite Index for China's smaller, second exchange sank 4.3 percent to 1,180.39.

"I'm afraid the market will remain bearish, at least for a while, as it seems there is a consensus that the only way to control current serious inflation is to sacrifice growth," said Liu Kan, an analyst at Guoyuan Securities, in Shanghai.

China on Friday ordered state-owned banks to set aside an additional 0.5 percent of deposits as reserves, effective Jan. 20. It was the seventh time in a year that the reserve rate was hiked.

China's central bank uses increases in bank reserves to help reduce the amount of cash circulating in the economy. A frenzy of lending over the past two years has helped China rebound quickly from the global crisis. But, combined with bad weather and rising global commodity prices, it has complicated efforts to cool inflation.

Japan's Nikkei 225 stock average closed up by less than 0.1 percent to 10,502.86. South Korea's Kospi was 0.4 percent lower at 2,099.85. Hong Kong's Hang Seng index slipped 0.5 percent to 24,156.97 and Australia's S&P/ASX 200 fell 0.8 percent to 4,763.10.

Benchmarks in New Zealand, Singapore and Taiwan also retreated.

Markets also will be watching meetings between Chinese leader Hu Jintao and President Barack Obama in Washington this week for any signs of improvement in often testy U.S.-China relations. But analysts did not expect major breakthroughs.

"The big story this week is the visit by President Hu, and I suspect they will be all smiles and emphasize the need for cooperation -- and then they'll politely resist each other's demands," said David Cohen of Action Economics in Singapore.

The U.S. wants Beijing to move toward faster appreciation of its currency. The Chinese government intervenes in currency markets to hold down the value of the yuan against the dollar -- by as much as 40 percent, according to U.S. manufacturers. That makes Chinese products cheaper for Americans while increasing the price of U.S. goods in China.

But Beijing says relaxing currency controls too abruptly would damage the Chinese financial system, hurt its exporters and cost jobs.

"I don't think the market is holding its breath" expecting China to relent to U.S. pressure on the yuan, Cohen said.

In currencies, the dollar was down against the yen, at 82.65.

On Friday, the Dow Jones industrial average gained 50.5 percent while the broader Standard & Poor's 500 index rose 0.7 percent.

Benchmark oil for February delivery was down 38 cents at $91.16 a barrel in electronic trading on the New York Mercantile Exchange. The contract rose 14 cents to settle at $91.54 a barrel on Friday.

[Associated Press; By COLLEEN BARRY]

Pamela Sampson in Bangkok and Ji Chen in Shanghai contributed to this report.

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