Euro rallies after support for Spain and Italy

The euro climbed by 1.1 per cent and looked set for its biggest daily rise in eight months, after leaders from the region agreed on emergency action to lower Italy and Spain’s borrowing costs and put a single supervisory body in place for euro area banks.

The European Union summit, which took place on Thursday and Friday, agreed to use its rescue funds in order to stabilise bond markets but not force nations that comply with the EU budget regulations to carry out additional economic reforms or austerity measures.

SMBC Nikko Securities senior market economist Hiroki Shimazu said that if what Herman Van Rompuy, the chairman of the European Council, said was actually agreed by European leaders, it would obviously surpass market expectations and is likely to be sufficient to stop risk aversion within financial markets.

The single currency climbed by over 1.2 per cent on a raft of stop-loss purchasing to $1.2628 at one stage, pulling away from Thursday’s low of 1.2407. It later settled at around 1.2573.

The EU leaders agreed that the European Stability Mechanism (ESM), the region’s future permanent bailout fund, could lend directly to recapitalise struggling banks without raising a nation’s budget deficit, and with no preferential seniority status.