IMF calls for dollar alternative

NEW YORK (CNNMoney) -- The International Monetary Fund issued a report Thursday on a possible replacement for the dollar as the world's reserve currency.

The IMF said Special Drawing Rights, or SDRs, could help stabilize the global financial system.

SDRs represent potential claims on the currencies of IMF members. They were created by the IMF in 1969 and can be converted into whatever currency a borrower requires at exchange rates based on a weighted basket of international currencies. The IMF typically lends countries funds denominated in SDRs

While they are not a tangible currency, some economists argue that SDRs could be used as a less volatile alternative to the U.S. dollar.

Dominique Strauss-Kahn, managing director of the IMF, acknowledged there are some "technical hurdles" involved with SDRs, but he believes they could help correct global imbalances and shore up the global financial system.

"Over time, there may also be a role for the SDR to contribute to a more stable international monetary system," he said.

The goal is to have a reserve asset for central banks that better reflects the global economy since the dollar is vulnerable to swings in the domestic economy and changes in U.S. policy.

In addition to serving as a reserve currency, the IMF also proposed creating SDR-denominated bonds, which could reduce central banks' dependence on U.S. Treasuries. The Fund also suggested that certain assets, such as oil and gold, which are traded in U.S. dollars, could be priced using SDRs.

Oil prices usually go up when the dollar depreciates. Supporters say using SDRs to price oil on the global market could help prevent spikes in energy prices that often occur when the dollar weakens significantly.

The dollar alternatives

Fred Bergsten, director of the Peterson Institute for International Economics, said at a conference in Washington that IMF member nations should agree to create $2 trillion worth of SDRs over the next few years.

SDRs, he said, "will further diversify the system."

Dollar firms after starting 2011 weak

The dollar has been drifting lower so far this year as the global economy improves and investors regain their appetite for more risky assets such as stocks and commodities.

After rising above 81 in early January, the dollar index, which measures the U.S. currency against a basket of other international currencies, eased below 77 earlier this week.

However, the dollar was higher Thursday against the euro, pound and yen as disappointing corporate results weighed on stock prices following several days of gains on Wall Street. The rally in the commodities market also cooled, with the price of oil and metals backing off recent highs.

In addition, renewed concerns about the debt problems facing troubled European economies put pressure on the euro and supported the dollar. The yield on Portugal's benchmark bond rose to a record high Wednesday, and borrowing costs for Ireland, Spain and Greece remain elevated.

"The market is shedding risk, with equities and commodities weakening and the U.S. dollar broadly stronger" said Camilla Sutton, currency strategist at Scotia Capital.

Traders were also digesting comments from Federal Reserve chairman Ben Bernanke, who told Congress Wednesday that despite a strengthening economic recovery, the unemployment rate remains high while inflation is "still quite low."

Those remarks reaffirmed the view that "the Fed would be very slow to tighten policy given its dual mandate of price stability and employment," analysts at Sucden Financial wrote in a research report.

Bernanke also urged lawmakers to come up with a "credible plan" to bring down "unsustainable" federal budget deficits.

"We expect that the outlook for the U.S. fiscal position will weigh heavily on the U.S. dollar in the quarters ahead," said Sutton. In the near-term, however, she said "a strengthening growth profile" could help provide "a temporary period of dollar strength."

The Insignificant G-20

Our G-Zero World

By Nouriel Roubini

2011-02-11

NEW YORK – We live in a world where, in theory, global economic and political governance is in the hands of the G-20. In practice, however, there is no global leadership and severe disarray and disagreement among G-20 members about monetary and fiscal policy, exchange rates and global imbalances, climate change, trade, financial stability, the international monetary system, and energy, food and global security. Indeed, the major powers now see these issues as zero-sum games rather than positive-sum games. So ours is, in essence, a G-Zero world.

In the nineteenth century, the stable hegemon was the United Kingdom, with the British Empire imposing the global public goods of free trade, free capital mobility, the gold standard, and the British pound as the major global reserve currency. In the twentieth century, the United States took over that role, imposing its Pax Americana to provide security to most of Western Europe, Asia, the Middle East, and Latin America. The US also dominated the Bretton Woods institutions – the International Monetary Fund, the World Bank, and, later, the World Trade Organization – to determine the global trade and financial rules, with the dollar as the main reserve currency.

Today, however, the US “empire” is in relative decline and fiscally over-stretched. Moreover, the rising power, China, which is not a liberal democracy, is pursuing a model of state capitalism, and is free-riding on the current global system – on trade, exchange rates, climate change – rather than sharing in the provision of global public goods. And, while there is general unhappiness with the US dollar, the Chinese renminbi is still far from becoming a major global reserve currency, let alone the dominant one.

This power vacuum has reinforced the absence of leadership on global economic and political governance within the G-20 since it succeeded the G-7 at the onset of the recent economic and financial crisis. Indeed, with the exception of the London summit in April 2009, when a consensus was reached on joint monetary and fiscal stimulus, the G-20 has become just another bureaucratic forum where much is discussed, but little is agreed upon.

As a result, the global economic powers have been left bickering about whether we need more monetary and fiscal stimulus or less of it. There are also major disagreements about whether to reduce global current-account imbalances – and about the role that currency movements should play in this adjustment. Exchange-rate tensions are leading to currency wars, which may eventually lead to trade wars and protectionism.

Indeed, not only is the Doha round of multilateral free-trade negotiations effectively dead, but there is also a rising risk of financial protectionism as countries re-impose capital controls on volatile global financial flows and on foreign direct investment. Likewise, there is very little consensus on how to reform the regulation and supervision of financial institutions – and even less on how to reform an international monetary system based on flexible exchange rates and the dollar’s central role as the leading reserve currency.

Global climate-change negotiations have similarly ended in failure, and disagreement reigns concerning how to address food and energy security amid a new scramble for global resources. And, on global geopolitical issues – the tensions on the Korean peninsula, Iran’s nuclear ambitions, the Arab-Israeli conflict, the disorder in Afghanistan and Pakistan, and the political transition in autocratic Middle East regimes – the great powers disagree and are impotent to impose stable solutions.

There are several reasons why the G-20 world has become a G-Zero world. First, when discussion moves beyond generic principles into detailed policy proposals, it’s much more difficult to reach clear agreements among 20 negotiators than among seven.

Second, G-7 leaders share a belief in the power of free markets to generate long-term prosperity and in the importance of democracy for political stability and social justice. The G-20, on the other hand, includes autocratic governments with different views about the role of the state in the economy, and on the rule of law, property rights, transparency, and freedom of speech.

Third, the Western powers now lack the domestic political consensus and financial resources to advance an international agenda. The US is politically polarized, and must at some point begin to reduce its budget deficit. Europe is preoccupied with its attempt to save the eurozone, and has no common foreign or defense policy. And Japan’s political stalemate on structural reforms has left it helpless to stem long-term economic decline.

Finally, rising powers like China, India, and Brazil are far too focused on managing the next stage of their domestic development to bear the financial and political costs that come with new international responsibilities.

In short, for the first time since the end of World War II, no country or strong alliance of countries has the political will and economic leverage to secure its goals on the global stage. This vacuum may encourage, as in previous historical periods, the ambitious and the aggressive to seek their own advantage.

In such a world, the absence of a high-level agreement on creating a new collective-security system – focused on economics rather than military power – is not merely irresponsible, but dangerous. A G-Zero world without leadership and multilateral cooperation is an unstable equilibrium for global economic prosperity and security.

Nouriel Roubini is Chairman of Roubini Global Economics, Professor of Economics at NYU’s Stern School of Business, and co-author of Crisis Economics: A Crash Course in the Future of Finance. This column is based on an article co-authored with Ian Bremmer, to be published in the March-April issue of Foreign Affairs (http://www.foreignaffairs.com/articles/67339/ian-bremmer-and-nouriel-roubini/a-g-zero-world).

Copyright: Project Syndicate, 2011.
www.project-syndicate.org
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This Week in Currencies: The Euro's Sinking Feeling

By Brian Dolan

European peripheral debt concerns are back front and center, with Portuguese bond yields hitting new euro-era all-time highs and CDS rising again. Yet there doesn’t seem to be any single development behind the renewed tensions. If we were to suggest the primary cause, it would be our view of a slow-developing sense of disappointment over EU negotiations on strengthening the EFSF (the current stabilization fund for peripheral bailouts, to be replaced by the so-called permanent crisis resolution, the ESM-European Stabilization Mechanism in 2013).

Bond markets have essentially demanded an expanded EFSF to minimize the risk of a sovereign default over the next two years, judging the current plan too small in the event of Portugal and Spain needing bailouts. Germany has rejected both expanding the size of the fund and allowing it to purchase peripheral government debt in the secondary market, two key elements markets were counting on. Italy is protesting any mandated annual debt reduction targets, undermining the very credibility of the “Competitiveness Package,” which is intended to convince markets European countries can get their debt under control. Lacking these critical pieces, it appears to us that markets are preparing to be underwhelmed by the final program. While negotiations may still produce a more credible reinforcement of the EFSF, markets seem to be pricing in disappointment and renewed fears of inevitable debt restructuring.

Eurozone finance ministers are holding a regularly scheduled meeting early next week and we will be alert for shifts in bargaining positions. But between the renewed strength in the USD (see below) and increasing doubts on the European debt plans, EUR/USD appears set to move lower again. Key support below is found between 1.3450/3500, the prior range highs in Dec.-Jan, and a break below there would target weakness to the 1.3360/65 daily Kijun line initially, and then the 1.3185 cloud base. Attempts to break above 1.3750/3800 have failed repeatedly, so continuing to sell strength is our preference.

All eyes on Mervyn King

The governor of the Bank of England Mervyn King gets to face his critics on Thursday when he presents the first Inflation Report of 2011 on Thursday. It t will go some way to telling us how close the Bank is to a rate in an environment where it is being increasingly criticised for leaving rates low while inflation pressures mount.

At the last Report in November the Bank’s forecast for the trajectory of prices was considered dovish. It predicted inflation remaining about 3.5 per cent for the first half of this year before falling rapidly to below the Bank’s 2 per cent target throughout 2012. This justified King’s view that monetary policy needs to remain loose to ward off the spectre of deflation.

Analysts will want to determine if these forecasts have changed based on the continued price pressures in the UK economy. UK price data is released on Tuesday and it is expected to rise to 4 per cent, 2 per cent above the target, due to rising commodity prices and the increase in sales tax that came into effect at the start of the year. Essentially, if the Bank sees inflation remaining elevated for longer than the second half of 2011, markets will perceive this as hawkish, which could boost the pound. It would also increase speculation of a near-term rate hike possibly as early as March due to the historical tendency of the Bank to move on rates the month after an Inflation Report. However, if there has not been a change to the forecasts then the markets will rapidly start to re-assess the 90 basis points of hikes priced in for the next 12 months. This would likely drag the pound lower.

There is no denying that price pressures have picked up in recent weeks and months, producer prices continued to rise in January, which will probably weigh on CPI on Tuesday. However, part of this is due to the rise in the sales tax, and hiking rates on the back of an increase in taxes could be too much for the fragile UK economic recovery to take. So this Inflation Report isn’t necessarily the game-changer that some may think it is. The growth outlook is still uncertain: economic statistics have been all over the place and austerity cuts have yet to take hold in a major way, which makes hiking rates in the current environment as risky as leaving them low even though fears are growing that inflation will become entrenched in the UK economy.

Overall, it’s likely to be a volatile few weeks for the pound. Above 1.6000 GBPUSD is in a technical uptrend, however, gains above 1.6250 have been fleeting and investors have been unwilling to establish pound longs above here, for good reason in our opinion. Below 1.5880 the rhythm of the pound has changed, and we could see GBPUSD start to turn lower.

The outlook for USD/JPY looks promising

Over the past few months we have frequently noted USD/JPY’s divergence from US Treasury yields in contrast to the historically positive correlation. While the rationale for higher rates in the US is clearly debatable, we believe it is predominantly due to a strengthening US economic outlook, since the timing of most yield advances was on the back of better than expected US data, rather than credit concerns over federal and state deficits. While the yield curve has shifted markedly higher since the 4^th quarter, the sharper ascent over the past few weeks finally sparked currency traders to take action in line with historical relationships (higher US rates, higher USD/JPY). Over the past week USD/JPY has broken above the recent consolidation pattern (connecting the December and January highs) as well as above the 55 and 100-day SMA’s.

On Monday, Japan is expected to report their 4Q preliminary GDP – consensus is looking for -2.0% annualized vs. +4.5% last quarter. Although a negative print is widely anticipated, it could further underpin Japan’s slowing and highlight their own massive deficit and debt overhang, which should ultimately undermine the Yen longer-term. Of late we have seen a lack of enthusiasm by Japanese investors to firmly remain in their Yen long positions, conceivably affirming the negative outlook. In addition, seasonal patterns point to further strength for USD/JPY over the next few weeks and we also believe Japanese year end repatriation flows, towards the end of March, are likely to be smaller than in years past. Furthermore, our proprietary interest rate and equity models suggest fair value for USD/JPY is around 89-92, which is still approximately 600-900 pips from where it’s currently trading. In the shorter-term, the dollar needs to break above 83.70 (January 7^th high) and 84.40/50 (series of December highs) before a more significant advance can take hold.

RBA expectations driving the Aussie

On Tuesday, the Reserve Bank of Australia will release its Monetary Policy meeting minutes detailing the Jan. 31 meeting. Recent reports from the RBA, as seen in last week’s quarterly Monetary Policy Statement and RBA Governor Glenn Stevens’ speech before a Parliamentary economics committee on Friday, indicate that while long term growth is expected to be robust, the near term economic outlook has been negatively impacted by adverse weather conditions (Q1 GDP could be 1% lower than pre-flood forecast) and is likely to warrant the bank to stay on hold for some time.

Governor Stevens stated that it is “probably reasonable that no hike (be made) for some time”. While he noted that the RBA believes that the CPI is likely to rise to 3% (the upper end of the RBA’s target range) in Q2 2011 instead of the previously forecast 2.5%, this figure showed “inflation a little lower than we had thought”. The tone of the RBA governor was much less hawkish than last week’s Monetary Policy Statement and sent the Aussie dipping below parity against the U.S. dollar. Stevens also noted that China is currently stronger than expected and that “China demand for resources to last some time”. As China has been tightening and is expected to continue this policy, there is potential risk for a slowdown in China which may shift expectations in Australia to the downside and weigh on AUD. The week ahead will see China PPI, CPI and trade balance data for January to provide more insight into the Chinese economy. The upside risk is for higher than expected inflation in Australia which may prompt the RBA to take a more hawkish stance. Such a scenario would result in a stronger AUD.

Short term weakness in AUD/USD can be viewed as buying opportunities as the longer term outlook remains bullish. Key technical levels include the daily Kijun line and 21-day sma which currently converge around 1.0000/10. The base of the daily ichimoku cloud, 21-week sma and 100-day sma currently comes in around 0.9900/10 as the next significant support zone. Key levels to the upside are the 1.01 pivot and the 1.02 figure ahead of post-float highs which are around 1.0255/60.

Technicals suggest a short term bottom for the buck

Safe haven and capital inflows saw the buck gain further traction this week. Uncertainty in Egypt alongside a substantial shift in capital flows from emerging market to developed economies have translated into weekly gains of about +0.5% for the USD Index. The reversal in the buck’s fortunes have led to technical developments that suggest a continuation for the current USD uptrend – the USD Index may have completed an inverted H&S bottom with a measured move objective slightly short of the key 80.00 level. The technical pattern formation in the USD Index has been corroborated by EUR/USD – the single currency has broken below H&S neckline support around the 1.3550 level suggesting a measured move objective towards the 1.3300 figure. Additional evidence for further dollar strength can be seen in the USD Index ascent above the daily Ichimoku cloud base – a daily close above 78.55 would be needed for technical upside confirmation. The move above significant Ichimoku levels has also been reflected in USD/JPY. The pair has firmly traded above daily cloud tops (82.50) and looks set to close above the weekly Kijun line (83.25). Recent price developments could be the beginning of a 2011 greenback revival as confirming signals are developing from both western and eastern methods of technical analysis.

Key data and events to watch in the week ahead

United States: Monday – Fed’s Dudley speaks at regional economic briefing Tuesday – Feb. Empire Manufacturing, Jan. Import Price Index, Jan. Advance Retail Sales, Dec. TIC Flows, Dec. Business Inventories, Feb. NAHB Housing Market Index Wednesday – Feb. 11 MBA Mortgage Applications, Jan. Housing Starts, Jan. Building Permits, Jan. PPI, Jan. Industrial Production, Jan. Capacity Utilization, FOMC Meeting Minutes Thursday- Jan. CPI, Weekly Jobless Claims, Jan. Leading Indicators, Feb. Philly Fed, Bernanke testifies on Dodd-Frank Friday – Bernanke speaks on global imbalances in Paris.

Eurozone: Monday – Dec. Industrial Production, EU finance ministers meeting in Brussels Tuesday – 4Q A GDP, Feb. ZEW Survey of Economic Sentiment, Dec. Trade Balance, German 4Q Prelim. GDP, German ZEW Surveys Thursday – Feb. Adv. Consumer Confidence Friday – Jan. Producer Prices.

United Kingdom: Tuesday – Dec. DCLG UK House Prices, Jan. CPI, Jan. Retail Price Index, Jan. RPI Wednesday – Jan. Claimant Count Change, Jan. Jobless Claims Change, Dec. ILO Unemployment Rate, Bank of England Inflation Report Friday – Jan. Retail Sales

Japan: Sunday – 4Q Prelim. GDP Monday – Dec. F. Industrial Production, Dec. F. Capacity Utilization Tuesday – BOJ Target Rate, Jan. F. Machine Tool Orders, Dec. Tertiary Industry Index

Canada: Wednesday – Jan. Leading Indicators, Dec. International Securities Transactions, Dec. Manufacturing Sales Thursday – Dec. Wholesale Sales Friday – Jan. Consumer Price Index, Jan. BoC CPI Core

Australia & New Zealand: Sunday – Australia Dec. Home Loans, NZ 4Q Retail Sales Monday – Australia Reserve Bank’s Board February Minutes Tuesday – Australia Dec. Westpac Leading Index, Australia Feb. DEWR Skilled Vacancies, Jan. New Motor Vehicle Sales Wednesday – RBA’s Lowe gives speech on 2011 Economics in Sydney, NZ Jan. Business PMI, NZ 4Q Producer Prices Inputs & Outputs, NZ Finance Minister English Speaks

China: Feb. 10-15 – Money Supply (M2) Sunday – Jan. Trade Balance, Jan. Exports & Imports, Monday – Jan. Producer Price Index Thursday – Conference Board China December Leading Economic Index.

Spanish Data Underline Malaise

By DAVID ROMAN for the WALL STREET JOURNAL

MADRID—Spain's economy bounced back slightly in the fourth quarter, but contracted for the whole of last year and is still growing at a slow pace, official data showed Friday.

Gross domestic product in the euro zone's fourth-largest economy rose 0.2% in the fourth quarter from the third quarter, the INE statistics institute said in its first estimate of gross domestic product for the quarter.

Compared with the year-earlier period, growth was up 0.6%, the fastest rate since the third quarter of 2008, when Spain's economy went into a tailspin amid a massive real estate bust, but still a low rate compared with the rest of the euro zone and the developed world. For the whole of 2010, the economy contracted 0.1%.

Lavinia Santovetti, a Nomura economist, said quarterly growth—in line with an earlier Bank of Spain estimate—was slightly above expectations for a 0.1% increase, and was probably driven by an increase in exports as Spanish markets in the euro zone and the U.S. recover, coupled with weak imports as domestic demand remains subdued.

INE will publish full fourth-quarter GDP numbers on Feb. 16., with a GDP breakdown.

Ms. Santovetti added that the Spanish number doesn't change Nomura's forecast for 0.4% euro-zone growth in the fourth quarter from the third quarter. Overall euro-zone data will be released on Feb. 15.

Spain's economic growth was flat in the third quarter, compared with the second quarter.

Portugal's Bond Sale Sets Off a Rally

JANUARY 13, 2011, 12:43 A.M. ET Wall Street Journal

European stock markets rallied broadly after a successful Portuguese bond auction allayed near-term fears about the spread of the euro-zone debt crisis.

Portugal successfully sold €1.25 billion ($1.62 billion) of government bonds, in what was viewed as a test of investor sentiment.

"It's one of those days where there's been a wave of euphoria passing through the market," said Justin Urquhart Stewart, co-founder of Seven Investment Management.

The Stoxx Europe 600 Index rose 1.4% to end at 285.79, hitting its highest level since September 2008.

In Portugal, the PSI 20 index rose 2.6%, helped by a 3.3% gain for retailer Jeronimo Martins SGPS, which reported a 19% increase in annual sales. Banco Espirito Santo rallied 5.8%.

In Athens, the ASE Composite stock index soared 5%. National Bank of Greece rose nearly 8%. In Madrid, the IBEX 35 index surged 5.4% to 10101.20, driven by financials. Banco Santander and rival Banco Bilbao Vizcaya Argentaria each soared 10%. Italy's FTSE MIB index rose 3.8% to 21116.30. UniCredit rallied 9.7% and Intesa Sanpaolo soared more than 10%.

Despite Wednesday's rally, analysts expressed caution. Oliver Gilvarry, head of research at Dolmen Stockbrokers, said the underlying problems for indebted euro-zone nations remain.

"Portugal is paying 4% on its two-year debt when underlying growth this year is likely to be negative. That's unsustainable," Mr. Gilvarry said.

Elsewhere, the French CAC 40 index ended up 2.2% at 3945.07, helped by aerospace groupEADS. Its shares rose 2.1% after its Airbus unit announced an order for 180 aircraft from Indian budget carrier IndiGo

In Germany, the DAX 30 index gained 1.8% to 7068.78. The U.K.'s FTSE 100 index closed up 0.6% at 6050.72.

Asian markets strengthened on Wednesday as resource shares got a lift from a jump in commodities prices.

Hong Kong's Hang Seng Index rose 1.5% to 24125.61, China's Shanghai Composite added 0.6% to 2821.31 and Australia's S&P/ASX 200 advanced 0.3% to 4724.21. India's Sensex snapped a six-day losing streak, rising 1.8% to 19534.10. Japan's Nikkei Stock Average ended up 0.02% at 10512.80.

BHP Billiton and Rio Tinto rose 1.3% each in Sydney, Aluminum Corp. of China gained 1.9% in Hong Kong and 0.4% in Shanghai, and Sterlite Industries added 6.5% in Mumbai.

A rise in crude-oil prices helped the shares of Chinese coal miners. Yanzhou Coal Mining rose 2.6% and China Coal gained 0.9% in Shanghai; in Hong Kong, they rose 1.8% and 2.1%, respectively.

In Seoul, the Kospi rose 0.3% to 2094.95 amid caution ahead of the Bank of Korea's policy meeting and interest-rate decision on Thursday.

Shares in the Ruentex group of companies were higher after American International Grouppicked the consortium to buy its Taiwan life-insurance unit. Supermarket operator Ruentex Development rose 2.7%, cement-and-chemical-fiber maker Ruentex Industries added 4.8% and footwear maker Pou Chen climbed 3.2%.

Bond Sale a Success in Portugal

By STEPHEN CASTLE and RAPHAEL MINDER

Published: January 12, 2011 New York Times

Portugal won some breathing room Wednesday with a better-than-expected bond auction that fueled a rise in global stock markets and led the government to reaffirm its stance against accepting a bailout.

Analysts cautioned that the sale could be merely a temporary reprieve, saying that the high yield demanded by investors was unsustainable in a country that lacked strong economic growth.

¶“It still looks like a matter of when, not if, Portugal is bailed out,” said Richard McGuire, fixed-income strategist at Rabobank in London. “An interest rate of 6.7 percent is still high for sustainable public financing.”

¶Portuguese officials disagreed, describing the auction as a success that vindicated their strategy of financing its debt through the markets rather than requesting aid from Europe’s financial rescue fund.

¶Portugal sold bonds valued at 1.25 billion euros, including 599 million euros maturing in 10 years at an average yield of 6.72 percent.

¶That yield is below the levels of the previous sale in November, though still high for Portugal’s struggling economy. Portugal has passed a variety of austerity measures that include public sector wage cuts, tax increases and a freeze on pension rates.

¶Last year, both Greece and Ireland were forced to apply for rescue financing within a month of breaching the 7 percent level.

¶Bond auctions in Spain and Italy on Thursday were expected to provide furthers signs of whether the euro zone debt crisis was temporarily calmed or in danger of spreading to bigger economies. Spain will offer bonds worth 3 billion euros ($3.89 billion), while Italy will offer bonds up to 6 billion euros.

¶As Portugal gained some respite, European officials increased pressure to expand the size of the rescue fund, saying it would provide a longer-term solution.

¶The “financing capacity must be reinforced and the scope of its activities widened,” José Manuel Barroso, president of the European Commission, said Wednesday in Brussels. He added that it was “perfectly possible” to come to a decision by Feb. 4, when European Union leaders are scheduled to meet.

¶Mr. Barroso appeared to be emboldened by the success of the Portuguese debt sale, which allowed him the political space to go on the offensive about the fund after weeks of private discussions about how to defuse the crisis.

¶The Portuguese auction, coupled with European Union efforts to expand the bailout fund, helped markets rise in the United States and Europe. In Spain, the main stock market index increased 5.4 percent Wednesday, its biggest daily gain since the bailout of Greece last spring.

¶All the major stock gauges in the United States were up, and the euro rose against the dollar to 1.3132 in late trading.

¶Fernando Teixeira dos Santos, the Portuguese finance minister, said that his country’s bond sale was “clearly a success.” He cited not only the high demand — investors bid for 2.6 to 3 times the number of bonds on offer — but also the fact that 80 percent of the bonds were bought by foreigners. That would allow the government to continue to “diversify our investor base,” he said.

¶Analysts took the comment as evidence that much of the foreign buying had come from Asia, given recent commitments by Japan and China to help euro zone countries finance their deficits.

¶José Sócrates, the prime minister of Portugal, has maintained that his country can meet its 20 billion euros in financing needs this year — equivalent to 11 percent of its gross domestic product — without a bailout from its European Union partners or theInternational Monetary Fund.

¶“Portugal won’t request any financial help for the simple reason that it doesn’t need it,” Mr. Sócrates said Tuesday.

¶Those assurances are likely to be met with further market skepticism, however, especially in light of a forecast on Tuesday from the Portuguese central bank, which said the country would go back into recession this year. A new slump would make it more difficult for the government to close a gaping budget deficit and meet its obligations.

¶“One auction result doesn’t mean the crisis is over,” said Charles Diebel, a strategist at Lloyds Bank Corporate Markets in London. “It’s just one hurdle amongst many.”

¶European Union officials have been working to prepare emergency loans to Portugal if a rescue becomes necessary. Analysts have said a bailout could require as much as 70 billion euros. Greece received a 110 billion euro rescue package last spring, while Ireland got an 85 billion euro bailout in December.

¶Vasco d’Orey, an independent Portuguese economist, said the bond auction meant that “the government is now off the hook in terms of public debt refinancing, at least for the first quarter for sure.” However, he added, “the next big hurdle is the refinancing needs of the banking system — and there I’m really not sure what will happen.”

¶Should Spain also find strong demand for its bond sale on Thursday, investors’ concerns are expected to shift to the financing needs of the banks, which have been shut out of the markets and have a significant exposure to a collapsed real estate market.

¶Mr. Barroso’s push to expand the bailout fund may signal his desire to assume a bigger role in steering the crisis. He has stuck his neck out on the issue before, urging support for Greece last spring before Germany was ready to agree to a bailout.

¶Chancellor Angela Merkel of Germany appeared to support the principle of strengthening the bailout fund, though she addressed it in the context of bolstering the euro. “We support whatever is needed to support the euro, also with respect to the rescue fund,” she said Wednesday at a news briefing in Berlin with Prime Minister Silvio Berlusconi of Italy, Bloomberg News reported.

¶François Baroin, the budget minister, speaking for the French government in Paris after a regular meeting of ministers, struck a frostier note, however. “We consider that the fund as it stands today is sufficiently big to meet requests made by this or that country,” he said, according to Reuters.

¶Some governments argue that extending the capacity of the fund sends a signal to the markets that the European Union expects Portugal, and maybe Spain, to call upon it and could therefore be self-defeating. But, after the comments Wednesday, the markets could well react negatively if there is no agreement at the Feb. 4 summit meeting.

VIDEO: "Strong Demand for Portuguese bonds.

¶This article has been revised to reflect the following correction:

¶Correction: January 14, 2011

¶An article on Thursday about the results of a bond auction by Portugal misstated the characteristics of some of the bonds. The sale, valued at 1.25 billion euros, included 599 million euros in bonds maturing in 10 years, not 699 million euros in bonds maturing in five years.