The euro's rebound from its weakest levels since January is injeopardy as banks from UBS AG to Morgan Stanley say they see moneyflowing out of the currency.

Foreigners were net sellers of European equities in the pastfive weeks, according to Zurich-based UBS. Morgan Stanley data showthat investors have had a net short, or bearish, position in thecurrency since September. The reports add to International MonetaryFund figures showing a drop in allocations to the euro by centralbanks since a 2009 peak.

German Chancellor Angela Merkel and French President NicolasSarkozy are counting on international support as they seek toresolve the region's sovereign debt crisis, setting a deadline ofthe Nov. 3 Group of 20 summit. While the euro has gained 2.7percent since a Sept. 12 low against nine developed- nationcounterparts as measured by Bloomberg Correlation-Weighted Indexes,it's about 3.8 percent below its high for the year in May.

“The big money, the real money managers, are paring theirexposure on a strategic basis,” Samarjit Shankar, a Boston-basedmanaging director of foreign exchange at Bank of New York MellonCorp., which administers about $26 trillion as the world's largestcustodial bank, said in an Oct. 11 interview. “Non-Europeanfixed-income investors are just calling it a day and pulling out ofEurope.”

Equity Flows

The amount of money investors pulled out of the region's mostindebted nations' bond markets this year as Greece 10-year yieldsrose above 20 percent was as much as twice the average of 2010,according to Bank of New York Mellon's “iflow” data, which is usedby the IMF and the Bank of Japan in their analyses.

UBS' equity-flow gauge showed investors cut their holdings ofshares in the euro zone in the five weeks through Oct. 7, while itwas “broadly flat” for U.S. stocks, analysts at the bank said in anOct. 10 report.

Instead of euros and dollars, central banks are putting morereserves into Japan, Britain, Australia and Canada, according toBarclays Plc and Citigroup Inc.

Europe's 17-nation currency traded at $1.3870 at 8:23 a.m. inLondon, having strengthened 3.8 percent last week to $1.3882. Itfell 0.2 percent to 107.04 yen today and climbed 4.4 percent to107.20 yen in the five days to Oct. 14. The BloombergCorrelation-Weighted Currency Index for the euro rose to 99.3268from 98.7399 on Oct. 7.

The median estimate of at least 30 analysts surveyed byBloomberg is for the euro to weaken to $1.35 by year-end, anddepreciate to 104 yen. UBS, the world's third-largest currencytrader, sees it falling to $1.20.

'Bear-Market Rally'

“We are in the midst of a bear market rally” and the currencyshould weaken to $1.25 in the first quarter of 2012, Calvin Tse, aforeign exchange strategist at New York-based Morgan Stanley, saidin an Oct. 14 interview.

Morgan Stanley's latest “FX Positioning Tracker,” which uses sixproprietary indicators including money flows through the firm andranges from -10 to 10, was -6 on Oct. 10. It was last neutral, orzero, on Sept. 5.

The euro rallied last week after Merkel and Sarkozy set athree-week deadline to devise a plan to recapitalize the region'sbanks and find a “durable” solution for Greece, which is injeopardy of defaulting. The euro is about 15 percent stronger thanits average versus the dollar since January 1999, buoyed in part bytheir pledges to preserve the monetary union.

Additional Powers

It also gained as Slovakia backed the enhanced EuropeanFinancial Stability Facility, the rescue fund that will have alending capacity of 440 billion euros ($609 billion), which is“ready” to use its expanded powers, according to EuropeanCommission President Jose Barroso. The EFSF has gained the power tobuy sovereign bonds, offer credit lines to governments and grantaid for bank recapitalizations. The fund's role had been to sellbonds to finance rescue loans.

Europe's revamped strategy won the backing of global financechiefs, who urged the region's leaders to deal “decisively” withthe turmoil when they meet for emergency talks in a week'stime.

“The plan has the right elements,” U.S. Treasury SecretaryTimothy F. Geithner told reporters in Paris. Bank of CanadaGovernor Mark Carney said that “some of what is being considered,if fully implemented, would be sufficient in our opinion.”

'Lot of Progress'

“We've actually seen a lot of progress, comments in the rightdirection showing that they are going to move forward in terms offinding a comprehensive solution,” Mary Nicola, a New York-basedforeign exchange strategist at BNP Paribas SA, said in an Oct. 12interview.

The euro may climb to $1.45 by year-end, she said, as Europemakes progress toward resolving its debt crisis and the FederalReserve starts to print money again to buy bonds as the economyfalters, debasing the greenback, according to Nicola.

At the same time European Union leaders expressed optimism thatthey can fix Greece, and France and Belgium decided to dismantleDexia SA, three years after rescuing what was once the world'slargest lender to municipalities, and Standard & Poor's cutSpain one level to AA- from AA.

Forcing losses on sovereign bondholders as a way to fix theregion's crisis may “damage the reputation of the single currencyinternationally, possibly adding to volatility in foreign-exchangemarkets,” the European Central Bank said in its monthly bulletin onOct. 13. “Public and private international investors may becautious about investing large portions of their wealth in assetsdenominated in a currency of sovereigns that may not fully” repaytheir debts, it said.

Declining Share

The euro's share of global reserves fell to 26.7 percent as ofthe end of June from a peak of 27.9 percent in September 2009, amonth before Greece's new government sparked the debt crisis byrevealing that its predecessor had understated the budget deficit,IMF data on Sept. 30 showed.

The pound's share of reserves was little changed at 4.2 percent,and up from 4 percent at the end of last year, while the yen's roseto 3.9 percent from 3.2 percent. Central banks and other wealthmanagers raised allocations to a group the IMF calls “othercurrencies,” which Citigroup says likely includes equal amounts ofAustralian and Canadian dollars and Swedish krona, to 4.9 percentfrom 3 percent.

'More Attractive'

Smaller Group of 10 “currencies are providing a more attractivealternative as they have a much better sovereign- credit situationand much greater exposure toward the fastest growing economies ofthe world,” Andrew Cox, a strategist at Citigroup in New York, saidin an interview on Oct. 11.

Reserve managers reduced their euro holdings by an equivalent of$11 billion in the year through June, adjusting for the currency'sappreciation, according to Citigroup.

Global reserves were $10.1 trillion at the end of June, up from$8.16 trillion at the end of 2009, according to the IMF, whichcalculates data from central banks that report their currencyallocations. Some countries, including China, whose $3.2 trillionin reserves are the world's largest, don't give currencybreakdowns.

China, the largest foreign lender to the U.S., raised itsholdings of Treasuries in July to the highest level in nine months,according to the Treasury Department statistics released Sept. 16.The world's second-largest economy boosted its U.S. debt securitiesto $1.17 trillion as China's trade surplus surged to the highest inmore than two years, the data showed.

Crisis to Crisis

While optimism that politicians can agree a plan on banks maypush the euro toward $1.40, gains won't last as the region is“likely to lurch from one crisis to another,” Chris Walker, astrategist at UBS in London, said in an Oct. 12 interview. “It willtake a major act of political unison and fundamental change in thesystem to solve the structural problems for good, something whichwould likely take time to implement.”

Hedge funds and other large speculators held a net 73,795contracts at the Chicago Mercantile Exchange as of Oct. 11 bettingon a drop in the euro, according to the Washington-based CommodityFutures Trading Commission. In May, there were a net 99,516contracts wagering on a gain.

“I don't see anything to be optimistic about in Europe,” JohnBrynjolfsson, chief investment officer at Aliso Viejo, California,Armored Wolf LLC, said in an Oct. 14 interview with Matt Miller onBloomberg Television's “Street Smart.” “The euro is depreciating,”said Brynjolfsson, who oversees about $1 billion. “That is a tradeyou definitely want to have on.”

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