Euro Claws Back Losses After ECB Agrees to Accept Greek Bonds

The euro is clawing back the day’s losses ahead of a critical European Union Summit in Brussels on Thursday, and is now in positive territory against the USD after the ECB offered an olive-branch to Greece.

Earlier this morning, ECB President Jean-Claude Trichet announced that the central bank will make loans against collateral graded as low as BBB-, but that the amount of loans obtained will be less that the higher AAA graded paper.

He added that interest rates remain “appropriate”.

Meanwhile, ahead of the EU summit in Brussels, German officials continued to reaffirm that aid to Greece must only come once the country fails to raise capital from the private sector.

Earlier this morning, EU Monetary and Economics Commissioner Olli Rehn told parliament that the EU Summit comes at a critical time for the euro zone, and that the monetary union must be defended. Regardless, all eyes and ears will be on the EU Summit, where a formal stance on the issue could be decided.

Speaking to reporters ahead of the start of the meetings Prime Minister George Papandreou is seeking support from the euro zone nations, so that the nation can raise the necessary capital to tackle its budget problems.

Also speaking at a press conference in Amsterdam earlier this morning, the central banker said a package led by the International Monetary Fund, and backed by member euro zone nations would be idea.

The comments go against the stance of European Central Bank Vice-President Jean-Claude Trichet, who has been pushing for a purely European solution, so as not to damage the credibility of the European Monetary Union.

In the overnight, and ahead of the EU summit in Brussels on Thursday, the euro declined to $1.3284USD, its worst level versus the greenback since May 7, 2009.

Nevertheless, with the ECB move resulting in Greek government bonds becoming less unattractive to investors, the euro has managed to recover, with EUR/USD last trader higher by 51 pips at 1.3366 after trading between 1.3284 and 1.3371 so far today.

Short term support lies at 1.3247 from May 6, 2009, and then 1.3213 from two days before that, while resistance is at 1.3569 followed by 1.3818.

Going forward, talk from the summit, is likely to be a hot topic for euro trader over the next several days. If the euro zone doesn’t come to the aid of Greece, expect the currency to decline further.