European markets climb higher

The euro hit its highest level in nearly three weeks against the dollar and shares climbed higher today on tentative optimism that Greece will reach a deal with its creditors on a debt swap, prompting a squeeze in short positions.

Market players were looking to a euro zone finance ministers' meeting today for a decision on the terms of a Greek debt restructuring ministers would be ready to accept in order to pave the way for Athens to access a second bailout package and avoid a chaotic default.

European stocks were higher this afternoon, up for the fifth time in six sessions as banking stocks surged following a report that France and Germany were calling for a relaxation of global bank capital rules to prevent a credit crunch.

The FTSEurofirst 300 index of top European shares was up 0.4 per cent at 1,047.06 points at 12.25pm, while the euro zone's blue chip Euro Stoxx 50 index was up 0.7 per cent at 2,442.82

However, the single currency was still vulnerable to renewed weakness as uncertainties remained about the outlook for Greece and other highly indebted euro zone countries.

Private creditors said yesterday they had come to the limits of what losses they could concede, putting the ball in the court of the European Union and the IMF.

The euro was supported by investors taking profit on short positions. Data showed speculators boosted net euro short positions to a fourth straight record in the week to January 17th.

"IMM data shows short positions are extremely stretched and we're seeing a squeeze today," said Lee Hardman, currency strategist at BTM-UFJ.

The euro was up 0.4 per cent at $1.3001 after hitting its strongest since early January at $1.3014 on EBS. Traders cited demand from Middle East accounts that lifted the currency and helped to trigger stop-losses on the break of Friday's high of $1.2986.

"The likelihood is that the (Greek debt) talks will converge somewhere where a deal is still voluntary," said Ankita Dudani, currency strategist at RBS.

Resolving the issue of a Greek debt swap is key to putting Athens' debt on a sustainable path and avoiding a chaotic default that could threaten the whole currency region.

Markets had hoped for an agreement over the weekend, and analysts said they were still betting on a deal, leaving room for disappointment.

"It is uncertain what will happen with the restructuring of Greek debt, and after that there will be tough negotiations with the EU and the IMF about the next financing facility," said Niels Christensen, currency strategist at Nordea in Copenhagen.

The technical outlook for the euro was improved by last week's break above the 21-day moving average at $1.2870 for the first time this year.

The common currency slumped to a 17-month low of $1.2624 earlier this month. Traders said a break back below $1.2870-80 could see major support at $1.2800-10 tested.

For the wider market, the Federal Reserve's two-day policy meeting starting on Tuesday will be the major event. Although no policy change is expected, the Fed could take the historic step of announcing an explicit target for inflation as part of its new communication strategy.

Traders said wariness ahead of this meeting and expectations of a continued easy monetary policy was helping to weigh on the dollar, pushing the dollar index below the 80.0 level. It was last down 0.4 per cent on the day at 79.879.

Reuters