Euro drops as markets digest details on bail-out for Greece

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WORLD stocks held firm yesterday, but the euro fell as investors digested details of the new aid deal for Greece and tried to gauge whether they are enough to stop the eurozone debt crisis from turning global.

With a Greek default averted for now, investors shifted their focus to the struggle in Washington to reach a deal to shrink its borrowing and to raise its $14.3 trillion (8.8bn) debt ceiling so the United States could avoid its own default and loss of its top-notch credit rating.

Anxiety over the absence of a US debt compromise renewed some safety bids for gold and US and German government debt.

Lena Komileva, global head of G10 currency strategy at Brown Brothers Harriman, said: "The deal (for Greece] is positive. A debt/growth deal is the only solution for an insolvent country and that is what the EU has done, but political and implementation risks remain."

The MSCI world equity index rose 0.32 per cent to its highest in two weeks and European markets were up, but Wall Street stocks opened flat.

In the currency market, the euro fell 0.3 per cent in mid-afternoon markets to $1.4356 after jumping nearly 1.5 per cent on Thursday.

Analysts and traders said the preliminary solution to the eurozone debt crisis presented in Brussels had steadied the situation, but there was still some uncertainty over the longer-term viability of the deal.

The FTSE closed at 5,935.02, up 0.6 per cent. The CAC in France was up 0.7 per cent and Germany's Dax 0.5 per cent.

A second bailout of Greece, pledged by eurozone leaders on Thursday, comprises an extra €109 billion (96bn) of government money, plus a contribution by private sector bond holders estimated to total as much as €50bn by mid-2014.

Rob Montefusco at Sucde Financial said: "We have some sort of solution for the European debt situation which helped the market yesterday and has kept it relatively steady today."

However, Michael Hewson, analyst at CMC Markets, said there were still many obstacles that need to be overcome before the package sees the light of day.

He said: "It has to be approved in 27 EU parliaments … and there is some unease among a lot of Germans that they could become the backstop for all of this. As a result we have seen a bit of profit-taking."

In the US, efforts are continuing to secure a last-minute deficit-reduction deal before the 2 August deadline to raise the country's debt ceiling.

Montefusco said the US situation was encouraging traders to take some exposure off the books. Phil Flynn, an analyst at PFGBest Research in Chicago, said the market would be looking to see if the talks would drag on into next week.

Data showing that Chinese manufacturing contracted in July also made some analysts and traders cautious. Commodity markets are focused on the economy of China as a major source of future demand growth. Christophe Barret, global analyst at Credit Agricole Corporate & Investment Bank, said: "Chinese oil demand is really slowing down, and the PMI was not encouraging at all. Fundamentals appear to be relatively weak."

China's apparent oil demand gained only 1 per cent from a year earlier to 8.99 million barrels per day in June, the slowest growth in more than two years.

Barret said the oil price rise could reverse once the market refocuses on oil fundamentals.

"Now the eurozone debt plan is out, we will get more assessment on what is happening in the oil market rather than what is happening elsewhere."