GLOBAL FOREX: Euro Surges After German-French Summit

The promise of a comprehensive plan to stem Europe's debt turmoil helped propel the euro to its largest one-day surge against the dollar since July 2010 Monday, as investors anticipated that the global economy might escape the fallout of a potential default or restructuring by Greece.

Over the weekend, Germany and France pledged to present a "comprehensive package" of measures designed to buttress the euro zone's banking sector and fortify the Continent's bailout mechanism, the European Financial Stability Facility, by the end of October. Although details were scant from the Franco-German meeting, markets across the world leapt on expectations that the end of the long-running debt saga might finally be at hand.

As investors piled back into stocks and higher-returning currencies, safe-haven demand for the dollar evaporated and sent the euro on a surge of more than 3.5 cents on the day. That represented a stark turnabout from last week, when the euro tumbled to an eight month low at $1.3145.

"Euro selling has been pretty relentless since last week," said David Gilmore, partner and analyst at FX Analytics. He noted that gloom about Europe had become "extreme", so the bilateral French-German summit gave investors an opportunity to reduce bets the euro would fall further.

"Price over time can shape the narrative, so it all bears watching," he added. "If [the euro] gets back above $1.40 people won't be so pessimistic."

The single currency pared some of its gains after political wrangling in Slovakia heightened the possibility that the governing party may reject the EFSF. According to established rules, all 17 nations which use the euro must ratify the bailout fund.

Late Monday, the euro was at $1.3637 from $1.3380 late Friday, according to EBS via CQG. The dollar was at Y76.70 from Y76.76, while the euro was at Y104.60 from Y102.85. The U.K. pound was at $1.5671 from $1.5561. The dollar was at CHF0.9038 from CHF0.9271.

The ICE Dollar Index, which tracks the U.S. dollar against a basket of currencies, was at 77.567 from about 78.726. Meanwhile, the Australian dollar breached parity with the greenback for the first time since Sept. 22.

Risks to the market's budding optimism are still vulnerable to political realities in Europe. A European Union summit was postponed from Oct. 17-18 to the 23rd, underscoring how divisions among euro zone politicians are making it difficult to find a solution to what ails the Continent.

Analysts say that the longer the uncertainty persists, the more intense the risks are to a global economy already suffering from weaker growth and a near-incalculable overhang of debt. A default by Greece could echo across Europe's banking sector and the global economy. It also carries with it the possibility of sending the borrowing costs of Italy and Spain, the euro zone's third and fourth largest economies, soaring to unsustainable levels.

"For now, the markets are rallying on the belief that there is forward moment on dealing with the European bank crisis," said Andrew Busch, global foreign exchange strategist at BMO Capital Markets in Chicago. "To me, this is an exercise in placing funding sand bags around the global banks to ensure they are not flooded by the rising river level of a Greek default."