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Euro zone deal lifts stocks, not euro

Euro zone steps toward fiscal unions buoy stocks in Asia. But a fall in the euro underscores ongoing worries over the euro zone's debt crisis.

By Chikako MogiReuters / December 12, 2011

A man walks past an electronic board displaying Japan's Nikkei share average outside a brokerage in Tokyo Dec. 12, 2011. Asian stocks gained but the euro fell on Monday after Europe took a step towards fiscal union, but caution may return as EU leaders failed to stem anxiety over whether their fragile safety net is sufficient to stop the debt crisis from spreading through the euro zone.

Toru Hanai/Reuters

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TOKYO

Asian stocks gained on Monday after Europe took a step towards fiscal union, but the euro fell amid concerns the euro zone's fragile safety is still insufficient to prevent its sovereign debt crisis from spreading.

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Twenty-six of the 27 European Union leaders on Friday agreed to pursue stricter budget rules for the single currency area and also to have euro zone states and others provide up to 200 billion euros in bilateral loans to the International Monetary Fund (IMF) to help tackle the crisis.

A Reuters report that China planned a new $300 billion vehicle to invest in Europe and the United States also buoyed investor sentiment, lifting U.S. stocks on Friday.

"There was some progress made in Europe, such as having an accord on funding, which helps negative sentiment to recede and risk-on mood to return," said Masafumi Yamamoto, chief FX strategist at Barclays in Tokyo.

"The fact that the IMF was involved and China was reportedly planning to invest in Europe shouldn't be overlooked either, as having global lenders interested in Europe was also a focal point in gauging the progress in the debt crisis," he said.

MSCI's broadest index of Asia Pacific shares outside Japan rose 1.2 percent on Monday, after sliding as much as 2.8 percent on Friday for a weekly drop of 3.5 percent on concerns over the EU summit's outcome. Japan's Nikkei stock average gained 1.3 percent.

Asian credit markets firmed on Monday on easing risk aversion, with spreads on the iTraxx Asia ex-Japan investment grade index narrowing by several basis points on Monday, but trading volume was thin.

Widespread views that the euro zone debt woes were far from being resolved pushed the single currency down 0.2 percent to $1.3350, off Friday's high of $1.3434. The dollar index, measured against six major currencies, inched up 0.1 percent, weighing on gold's safe-haven appeal.

FUNDING STRAINS

Officials gave a guarded assessment to the result of the EU summit. IMF chief economist Olivier Blanchard said an agreement for deeper economic integration was a step in the right direction but not a complete solution for the crisis.

While bilateral loans to the IMF would help beef up its resources to help struggling euro zone economies when needed, the volume at the euro zone's bailout fund was still seen insufficient to safeguard core euro zone economies from the contagion of the debt crisis.

The capacity of a permanent bailout fund was capped and it was not granted a banking licence.

That will keep intense pressure on the European Central Bank to take on a role as lender of the last resort to help resolve the debt crisis, which has intensified a credit contraction in the euro zone.