U.S. dollar trims declines against euro after data .

The dollar pared losses against the euro after data showed the pace of business activity in the U.S. Midwest rose in July.

The euro last traded at $1.2280, up 0.2 percent on the day, compared with $1.2297 before the data.

"What it does do, however, is guarantee the Fed won't take any action tomorrow because we have not seen enough pullback in the U.S. economy to justify any action," said Kathy Lien, managing director of BK Asset Management in New York.

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WRAPUP 1-Slower Canada growth may keep rates 'low for longer'

* GDP growth disappoints, casts doubt on Q2 forecasts

* Bank of Canada seen in "low for longer" rate stance

* Natural resources, retail, finance main drivers of growth

* Manufacturing and construction shrink

* Industrial product, raw materials prices fall in June

OTTAWA, July 31 (Reuters) - Economic growth in Canada shifted into low gear in May on unexpected weakness in the manufacturing sector, casting doubt on the country's ability to distance itself from the disappointing performance plaguing the United States.

The weaker-than-expected 0.1 percent monthly gain in gross domestic product in May, following a healthy 0.3 percent jump in April, puts the second quarter on track for annualized growth of less than 2 percent.

That means the Bank of Canada will likely remain on the sidelines on raising interest rates until at least 2013 because growth doesn't look fast enough to cause inflationary pressures.

"Following a strong start to the quarter, this print is a bit disappointing and we would not be surprised to see continued weakness bleed into June," David Tulk, chief macro strategist at TD Securities, said in a note to clients.

"We share the (central) bank's desire to take the overnight rate higher once conditions improve, which is very unlikely to happen until at least early in 2013. Until that time, the theme of 'lower for longer' for the overnight rate will prevail," he said.

The Canadian dollar slipped after the GDP figures were released, falling to C$1.0035 versus the greenback, or 99.65 U.S. cents, from about C$1.0029 just before the data came out. [ID: nL2E8IV3C0]

Canada fared better than most of its peers in the rich, industrialized world in the aftermath of the 2007-09 global financial crisis, prompting the Bank of Canada to become the first central bank in the Group of Seven to tighten monetary policy after the recession.

Since April this year, the bank has again signaled its intention to raise rates, but unless growth accelerates it has little motive to act.

"Much like its U.S. counterpart, the Canadian economy seems unable to break out of its sub-par growth trajectory," said Doug Porter, deputy chief economist at BMO Capital Markets.

Other data on Tuesday showed producer prices fell 0.3 percent in June from May as cheaper fuel offset price increases for cars. But without the impact of the Canadian dollar's depreciation against the U.S. dollar in the month, the producer price index would have fallen 0.8 percent.

Raw materials prices fell for the fifth straight month in June, down 4.0 percent, mainly due to a sharp fall in crude oil prices. [ID: nL2E8IU7E4]

Analysts in a Reuters poll had forecast, on average, 0.2 percent GDP growth in May, following April's 0.3 percent expansion.

Goods-producing industries overall were flat in May while services industries eked out a 0.1 percent gain in the month.

The mining and oil and gas extraction industry grew at a robust pace for the second straight month as crude production continued to rise after maintenance and production shutdowns in February and March. The 0.6 percent jump in May output followed a 2.0 percent surge in April.

Retail sales, finance and insurance businesses and wholesale trade also contributed to growth.

Contrary to expectations based on previous data on factory sales, manufacturing declined 0.5 percent while construction activity contracted by 0.2 percent as the housing market softened.

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EURUSD Measured Support at 1.2153

The implications from the model are that the USD weakens (on balance) for another several weeks before ‘take-off’.

The AUDUSD has tagged the line that extends off of the July highs. This line, in conjunction with the 3/6 and 3/19 lows at 10509 and 10557 is a good place for the beginning of a larger pullback (probably a b wave).

The EURUSD continues to consolidate the 5 wave advance from 12040. A drop below 12225 could compose wave c and the end of a 3 wave decline from 12389. A measured level for support is 12154 (c=a). As such, longs are favored into 12150s against 12040. An objective remains 12550 (38.2% retracement of larger wave 3 from 13385).

AUDUSD – Daily Bars

Prepared by Jamie Saettele, CMT

EURUSD – 60 Minute Bars

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Dollar pares loss ahead of Fed, ECB.

The dollar pared a decline against the euro and gained ground versus other major currencies on Tuesday, as traders awaited the kickoff of a two-day meeting of U.S. Federal Reserve policy makers and Thursday’s policy meetings at the European Central Bank and Bank of England.

The ICE dollar index DXY -0.20% , which measures the greenback against a basket of six currencies, traded at 82.820, down from 82.829 in late North American trading on Monday.

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Heat rises on Fed, ECB

The U.S. Federal Reserve and European Central Bank face critical tests this week amid heightened expectations that they are moving toward new actions to tackle fragility in the global economy. Photo: Getty Images

The euro EURUSD +0.38% traded at $1.2277, after topping $1.23 and compared to $1.2256 Monday.

The British pound GBPUSD -0.31% fetched $1.5630, down from $1.5704 on Monday.

Against the Japanese currencyUSDJPY -0.07% , the dollar bought 78.23 yen, from ¥78.19 Monday.

The European Central Bank and the Bank of England will both meet on Thursday to decide on interest rates.

Currency traders are most focused on the ECB and whether it announces it will restart a sovereign bond purchase program, hold another long-term unlimited lending operation or lower interest rates.

Last week, ECB President Mario Draghi stirred expectations for a major policy announcement by stating that the central bank will do what it takes within its mandate to save the region from disintegration.

The euro came off its highs after an unnamed Bundesbank official told CNBC that Germany’s central bank wants monetary policy in the euro zone to remain strictly focused on price stability, while members having fiscal problems should utilize fiscal instruments, such as the European Financial Stability Facility, to address them.“Investors will be looking for the central bank and Europe in general to deliver on their promise to do everything to save the euro,” said Kathy Lien, managing director at BK Asset Management. “If the ECB disappoints, the euro-dollar could come under fresh selling pressure.”

That led analysts to believe the “ECB is not going to be unveiling big measures this week,” said Christopher Vecchio, a currency analyst at DailyFX.

Separately, the U.S. Federal Reserve starts its two-day interest-rate meeting during the session.

Many analysts don’t expect the Fed to announce a third round of quantitative easing, opting to hold off until September to see whether economic data continues to weaken.

The Fed could, however, change its policy statement to extend the period of low rates beyond 2014, or cut the interest rate the Fed pays banks for reserves held at the Fed to encourage lending.

Against the Australian dollar AUDUSD +0.14% , the U.S. unit fell. The aussie bought $1.0505, from $1.0498 in late trading in the previous session.

The WSJ dollar index XX:BUXX -0.19% , a recently launched gauge of the dollar’s performance against other heavily traded major currencies, traded at 71.77, compared with 71.81. 

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FOREX-Euro loses momentum, Aussie up on stimulus hopes.

* Euro takes a breather, retreats from 3-week high

* Euro zone data dismal, businesses more pessimistic

* Aussie still strong on European stimulus hopes

By Ian Chua

SYDNEY, July 31 (Reuters) - The euro consolidated recent gains on Tuesday following a slew of negative economic news, while high expectations that major central banks were poised to add more stimulus helped keep risk currencies like the Australian dollar at multi-month highs.

The euro bought $1.2260, having retreated from a three-week peak near $1.2400. Good support is seen around $1.2216, a level representing the 50 percent retracement of its July 24-27 rally.

Data on Monday added to the urgency for policymakers to act soon with economic sentiment in the euro zone falling to near a 3-year low as the bloc's economy deepened its slump and businesses became more pessimistic.

"There's mounting hopes surrounding the European Central Bank interest rate decision...and it seems as though the central bank head will continue to embark on its non-standard measures in an effort to stem the risk for contagion," said David Song, currency analyst at DailyFX.

"We may see the Governing Council lean towards a zero interest rate policy as the region heads for a prolonged recession, and the central bank may have little choice but to implement a range of tools over the coming months as the outlook for growth and inflation falter."

Against the yen, the single currency fetched 95.82 , down from a 1-1/2 week high around 97.33 set Friday. But on the high-flying Aussie, it plumbed a record low round A$1.1646.

The Aussie and other high-beta currencies have been among the best performers recently, thanks largely to expectations that both the ECB and Federal Reserve are moving closer to providing more aid to support their respective economies.

This will cement the status of both the euro and dollar as funding currencies of choice for carry trades, dealers said.

The Aussie was last at $1.0501, within easy reach of a four-month peak of $1.0508 set on Monday. It was near the top-end of an uptrend channel drawn from early June.

Markets were also keeping an eye on the Swiss National Bank's FX reserve allocations due on Tuesday amid talk the central bank has been buying the Australian dollar.

The modest pullback in the euro helped the dollar index edge off a three-week trough of 82.343 to 82.831. Against the yen, the greenback bought 78.15, remaining in a thin 78.00-78.60 band seen in the past week.

With the outcome of the Fed's meeting due on Wednesday and that of the ECB on Thursday, traders expect markets to turn subdued as investors retreat to the sidelines to await their decisions.

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UPDATE 1-Obama warns of economic 'headwinds,' sees euro surviving.

President Barack Obama warned on Monday the U.S. economy would face continuing "headwinds" over the next few months, with Europe's debt crisis still posing a challenge, but predicted the euro zone and its currency would remain intact.

"I don't think ultimately that the Europeans will let the euro unravel but they are going to have to take some decisive steps," Obama said at a campaign fundraiser in New York.

"I am spending an enormous amount of time trying to work with them, and (Treasury Secretary) Tim Geithner is trying to work with them," he said. "The sooner they take some decisive action, the better off we're going to be."

Obama's re-election bid is threatened by high U.S. unemployment and a stumbling economy, which has felt shockwaves from Europe's debt troubles.

"Right now, the economy is still rough enough for enough people that this is going to be a close election," Obama said. Polls show him in a dead heat with Republican challenger Mitt Romney ahead of the Nov. 6 election.

U.S. economic growth slowed in the second quarter to a 1.5 percent annual rate, the weakest pace in a year, the Commerce Department said on Friday.

"We're going to have some continued headwinds over the next several months," Obama said. "Europe is still a challenge."

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How to Manage Losing Trades.

If there is one feeling that traders universally abhor, it would probably be the emotion derived from watching a losing trade turn deeper, and deeper against them.

At this specific point in time – you are watching yourself getting poorer; the complete antithesis of why you trade.

If the trade is left unchecked, things can get really ugly very fast. An overleveraged position can lead to an outsized loss; and as a position can move against you for an extended amount of time, these losses can irreparably damage futures.

Prevention is the Best Medicine

By prevention, we don’t mean preventing taking trading losses altogether. That would be impossible. Rather, we refer to the fact that traders should do their best to prevent unmanageable trading situations and placing themselves in these precariously unfavorable scenarios.

This is like a trader taking an overleveraged position, without a stop on the position – and after the trade moves against them they have to watch and decide how to react after they’ve already lost money; and are staring at the prospect of losing much more.

We saw the effects of this phenomenon in the DailyFX Traits of Successful Traders series. The Number One Mistake that Forex Traders Make is the fact that they take such large losses and such small wins. The chart below will show the average gain v/s the average loss on some of the most popular currency pairs, as taken from The Number One Mistake that Forex Traders Make:

Average gain (in blue) and Average loss (in red); Taken from The Number One Mistake Forex Traders Make

So much so that these traders can even have a winning percentage of 60% and STILL be losing money as a whole.

Many may think that this mistake is relegated to new traders. It is not. As a matter of fact, confidence can be a huge contributor to this conundrum.

Confident traders, thinking they could successfully manage trades on the fly – might look to take a large position on what they feel to be an extraordinary opportunity.

This trader has forgotten that nobody can tell the future, but this happens to all of us. We think we have an inside track and we want to take advantage of our opportunity.

But before you know it, hope can turn to despair. And overconfident, experienced traders can suffer from lack of planning just as easily as a new trader.

There is no reason to belabor the past if this has happened, or is happening to you. It’s happened to me, and it’s happened to most traders.

The only way to fix it is to learn… and institute this in your trading plan.

As David Rodriguez stated in The Number One Mistake that Forex Traders Make: 'Always trade with a stop.'

Set your maximum loss on the outset of the trade, before you have any ‘skin in the game,’ so thatyou don’t have to ask yourself the dreaded questions of ‘when is enough,’ while you’ve already got alosing trade on your hands.

Acceptance

Some traders might not consider losses on open positions as losses until the trade is already closed.

Make no mistake about it – these are still losses. This money is no longer yours as the price that you previously paid is no longer trading in the current market.

A floating loss is still a loss; it just hasn’t been realized yet.

So if you do find yourself in a losing position with the question of ‘when should I stop the bleeding?’ you should first accept the fact that the loss on the position is an actual loss. It just hasn’t yet been realized as a loss, and you still have the chance to lose more.

Set Your Line in the Sand

When looking at the equity on the account – taking into account floating gains and losses – you can then decide how much more you want to commit to this trading idea.

In the DailyFX Trading Course, we advise keeping total risk to less than 5% of an accounts’ equity; so if a trader has equity of $10,000 in their account – they would attempt to keep losses below $500.

Some traders will take this concept a step further, and allow themselves to diversify within this risk amount. So if a trader wants to be able to manage 4 trades at once, and keep total account risk toless than 5%, they can look to risk 1.25% of their account equity on 4 different trade ideas. Using the above trader with a $10,000 account, looking to keep total risk below $500 – they can place 4 different trades, risking $125 each.

You can take your current account equity, and calculate the percentage of that equity that you want to further commit to this idea. Once you have that amount, you can place a stop on the trade so that if price moves that far against you – the bleeding will be stopped.

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MONEY MARKETS-Draghi offers Spanish bank, sovereign CDS respite

The cost of insuring debt issued by Spanish banks and by the sovereign against default fell on Monday on bets the European Central Bank could soon resume its bond-purchasing programme in a bid to bring Spain's borrowing costs to sustainable levels.

ECB President Mario Draghi said last week the central bank would do whatever it takes to protect the euro, prompting a majority of money market traders in a Reuters poll to say the central bank would soon re-start its bond-buying programme.

Some analysts are worried that the market is getting ahead of itself, but many say Draghi knows better than to gamble his credibility and will have to deliver some sort of action after his bold statement last week.

"Draghi has seemed to put his credibility on the line to a certain extent. You think he must have some confidence that he will be able to deliver something," Gavan Nolan, analyst at Markit said. "It's just a matter of whether what he has announced is enough."

In his boldest comments since taking the ECB's helm last November, Draghi pledged on Thursday to do whatever was necessary to protect theeuro zone from collapse, specifically mentioning high risk premiums on some sovereign debt. The comments have gone some way to easing pressure on Spanish funding costs, which are now comfortably below the 7 percent danger level and credit default swap prices.

But analysts are worried that any relief from such ECB action will be short-lived and that inaction would do a lot of damage given expectations.

CDS on Santander debt fell 25 basis points on Monday to 409 and the BBVA equivalent eased 16 bps to 426 bps. Those CDS prices hit record highs of 490 and 510 respectively last week, according to Markit data.

The cost of insuring Spanish debt against default fell 19 bps to 532 bps and the Italian equivalent was 14 bps lower at 484 bps. Spanish CDS also hit a record of 638 bps last week.

"I think expectations are high  I think we would go to the previous wides (highs for CDS prices) if they did nothing," Michael Hampden-Turner, credit strategist, Citigroup.

"The market expects that he has something to announce, and that was a sort of a pre announcement. There is quite a strong risk that they get disappointed because we are sort of wondering what he could possibly have up his sleeve without (Germany) being in agreement."

The Bundesbank pushed back on Draghi's pledge last week and the ECB chief will also meet Bundesbank President Jens Weidmann, a strong opponent of the ECB's government bond purchase programme, ahead of Thursday's ECB meeting.

Chancellor Angela Merkel discussed the euro crisis with both French President Francois Hollande last Friday and then with Italian Prime Minister Mario Monti on Saturday.

After each call, the leaders issued joint statements pledging they would do everything to protect the euro zone, underscoring market expectations that something is in the works.

Given bond-purchases' fleeting impact in the past, it could well be that the ECB is mulling another form of action but only a bolder move than bond-buying would have a lasting impact, analysts said.

"We will probably see (CDS spreads) grind tighter in the run-up to the meeting. I think a lot of it will have been priced in already by that stage, depending on what the announcement on Thursday is, unless there is something more radical than the simple reopening of the Securities Markets Programme," Nolan said.

"Something like giving the ESM a banking license, that would be a game-changer, but I think it's pretty unlikely that that will be announced."

The ECB would like to see Europe's permanent bailout fund start buying the bonds of troubled euro zone members, but the fund's limited firepower could make its intervention less effective.

One idea, favoured by France, is to give the ESM access to ECB funding with a banking licence - something that 17 out of 24 money market traders expect to eventually happen, although they were divided on when. 

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MONEY MARKETS-Draghi offers Spanish bank, sovereign CDS respite

The cost of insuring debt issued by Spanish banks and by the sovereign against default fell on Monday on bets the European Central Bank could soon resume its bond-purchasing programme in a bid to bring Spain's borrowing costs to sustainable levels.

ECB President Mario Draghi said last week the central bank would do whatever it takes to protect the euro, prompting a majority of money market traders in a Reuters poll to say the central bank would soon re-start its bond-buying programme.

Some analysts are worried that the market is getting ahead of itself, but many say Draghi knows better than to gamble his credibility and will have to deliver some sort of action after his bold statement last week.

"Draghi has seemed to put his credibility on the line to a certain extent. You think he must have some confidence that he will be able to deliver something," Gavan Nolan, analyst at Markit said. "It's just a matter of whether what he has announced is enough."

In his boldest comments since taking the ECB's helm last November, Draghi pledged on Thursday to do whatever was necessary to protect theeuro zone from collapse, specifically mentioning high risk premiums on some sovereign debt. The comments have gone some way to easing pressure on Spanish funding costs, which are now comfortably below the 7 percent danger level and credit default swap prices.

But analysts are worried that any relief from such ECB action will be short-lived and that inaction would do a lot of damage given expectations.

CDS on Santander debt fell 25 basis points on Monday to 409 and the BBVA equivalent eased 16 bps to 426 bps. Those CDS prices hit record highs of 490 and 510 respectively last week, according to Markit data.

The cost of insuring Spanish debt against default fell 19 bps to 532 bps and the Italian equivalent was 14 bps lower at 484 bps. Spanish CDS also hit a record of 638 bps last week.

"I think expectations are high  I think we would go to the previous wides (highs for CDS prices) if they did nothing," Michael Hampden-Turner, credit strategist, Citigroup.

"The market expects that he has something to announce, and that was a sort of a pre announcement. There is quite a strong risk that they get disappointed because we are sort of wondering what he could possibly have up his sleeve without (Germany) being in agreement."

The Bundesbank pushed back on Draghi's pledge last week and the ECB chief will also meet Bundesbank President Jens Weidmann, a strong opponent of the ECB's government bond purchase programme, ahead of Thursday's ECB meeting.

Chancellor Angela Merkel discussed the euro crisis with both French President Francois Hollande last Friday and then with Italian Prime Minister Mario Monti on Saturday.

After each call, the leaders issued joint statements pledging they would do everything to protect the euro zone, underscoring market expectations that something is in the works.

Given bond-purchases' fleeting impact in the past, it could well be that the ECB is mulling another form of action but only a bolder move than bond-buying would have a lasting impact, analysts said.

"We will probably see (CDS spreads) grind tighter in the run-up to the meeting. I think a lot of it will have been priced in already by that stage, depending on what the announcement on Thursday is, unless there is something more radical than the simple reopening of the Securities Markets Programme," Nolan said.

"Something like giving the ESM a banking license, that would be a game-changer, but I think it's pretty unlikely that that will be announced."

The ECB would like to see Europe's permanent bailout fund start buying the bonds of troubled euro zone members, but the fund's limited firepower could make its intervention less effective.

One idea, favoured by France, is to give the ESM access to ECB funding with a banking licence - something that 17 out of 24 money market traders expect to eventually happen, although they were divided on when. 

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MONEY MARKETS-Draghi offers Spanish bank, sovereign CDS respite

The cost of insuring debt issued by Spanish banks and by the sovereign against default fell on Monday on bets the European Central Bank could soon resume its bond-purchasing programme in a bid to bring Spain's borrowing costs to sustainable levels.

ECB President Mario Draghi said last week the central bank would do whatever it takes to protect the euro, prompting a majority of money market traders in a Reuters poll to say the central bank would soon re-start its bond-buying programme.

Some analysts are worried that the market is getting ahead of itself, but many say Draghi knows better than to gamble his credibility and will have to deliver some sort of action after his bold statement last week.

"Draghi has seemed to put his credibility on the line to a certain extent. You think he must have some confidence that he will be able to deliver something," Gavan Nolan, analyst at Markit said. "It's just a matter of whether what he has announced is enough."

In his boldest comments since taking the ECB's helm last November, Draghi pledged on Thursday to do whatever was necessary to protect theeuro zone from collapse, specifically mentioning high risk premiums on some sovereign debt. The comments have gone some way to easing pressure on Spanish funding costs, which are now comfortably below the 7 percent danger level and credit default swap prices.

But analysts are worried that any relief from such ECB action will be short-lived and that inaction would do a lot of damage given expectations.

CDS on Santander debt fell 25 basis points on Monday to 409 and the BBVA equivalent eased 16 bps to 426 bps. Those CDS prices hit record highs of 490 and 510 respectively last week, according to Markit data.

The cost of insuring Spanish debt against default fell 19 bps to 532 bps and the Italian equivalent was 14 bps lower at 484 bps. Spanish CDS also hit a record of 638 bps last week.

"I think expectations are high  I think we would go to the previous wides (highs for CDS prices) if they did nothing," Michael Hampden-Turner, credit strategist, Citigroup.

"The market expects that he has something to announce, and that was a sort of a pre announcement. There is quite a strong risk that they get disappointed because we are sort of wondering what he could possibly have up his sleeve without (Germany) being in agreement."

The Bundesbank pushed back on Draghi's pledge last week and the ECB chief will also meet Bundesbank President Jens Weidmann, a strong opponent of the ECB's government bond purchase programme, ahead of Thursday's ECB meeting.

Chancellor Angela Merkel discussed the euro crisis with both French President Francois Hollande last Friday and then with Italian Prime Minister Mario Monti on Saturday.

After each call, the leaders issued joint statements pledging they would do everything to protect the euro zone, underscoring market expectations that something is in the works.

Given bond-purchases' fleeting impact in the past, it could well be that the ECB is mulling another form of action but only a bolder move than bond-buying would have a lasting impact, analysts said.

"We will probably see (CDS spreads) grind tighter in the run-up to the meeting. I think a lot of it will have been priced in already by that stage, depending on what the announcement on Thursday is, unless there is something more radical than the simple reopening of the Securities Markets Programme," Nolan said.

"Something like giving the ESM a banking license, that would be a game-changer, but I think it's pretty unlikely that that will be announced."

The ECB would like to see Europe's permanent bailout fund start buying the bonds of troubled euro zone members, but the fund's limited firepower could make its intervention less effective.

One idea, favoured by France, is to give the ESM access to ECB funding with a banking licence - something that 17 out of 24 money market traders expect to eventually happen, although they were divided on when. 

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Merkel, Monti: will do all to protect eurozone.

Germany's Merkel, Italy's Monti agree to do everything to protect eurozone; to meet next month.

The German and Italian leaders have pledged to do everything to protect the eurozone, adding to a string of assurances over recent days that Europe is determined to get a grip on the continent's debt crisis — but their governments again gave no details of any action.

Sunday's statement from Germany and Italy came before markets open for a week in which close attention will be focused on Thursday's meeting of the European Central Bank's policy-setting governing council. Last Thursday, ECB President Mario Draghi said the ECB would do "whatever it takes" to preserve the euro — and markets surged on hopes of action.

Chancellor Angela Merkel and Italy's Premier Mario Monti spoke by phone Saturday and "agreed that Germany and Italy will do everything to protect the eurozone," German government spokesman Georg Streiter said. Monti's office said they agreed to "take all necessary measures to protect the eurozone."

That was nearly identical to a statement issued Friday by Merkel and French President Francois Hollande, which came in the wake of Draghi's comments.

None of the leaders have said anything about any specific action. But the comments raised expectations that the ECB might step in to buy Spanish and perhaps Italian government bonds to lower the countries' borrowing costs, which have been worryingly high in recent weeks.

Another possibility might be for the eurozone's temporary rescue fund, the European Financial Stability Facility, to buy bonds — though Merkel's finance minister, Wolfgang Schaeuble, has dismissed talk that Spain might apply to the fund for such help. He told the Welt am Sonntag newspaper that "there is nothing to this speculation."

Italy and Spain have the eurozone's third- and fourth-largest economies respectively, behind Germany and France.

Merkel and Monti agreed that decisions made by last month's European Union summit "must be implemented as quickly as possible," Streiter said, again echoing Friday's Merkel-Hollande statement.

Those included allowing Europe's bailout fund — once a new, independent bank supervisor is set up — to give money directly to a country's banks, rather than via the government. Countries that pledge to implement reforms demanded by the EU's executive Commission also would be able to tap rescue funds without having to go through the kind of tough austerity measures demanded of Greece, Portugal and Ireland.

Merkel invited Monti to visit Berlin in the second half of August and he accepted the invitation, the two governments said.

The assurances come as concern flares again about Greece. International debt inspectors are scrutinizing Greece's finances and its progress in implementing unpopular budget cuts and reforms demanded in exchange for the rescue loan program that is keeping the country afloat.

Greek officials have called for more time to implement the measures, but patience among creditors is running short. If the inspectors' report, expected in September, is damning, Athens could stop receiving loans and face bankruptcy and an exit from the 17-nation euro.

"The aid program is already very accommodating. I cannot see that there is still scope for further concessions," Germany's Schaeuble was quoted as telling Welt am Sonntag.

As part of its austerity efforts, Greece has achieved a remarkable reduction of its budget deficit from 15.8 percent in 2009 to 9.1 percent last year. However, the country is considerably off-target in other areas of reform.

Athens largely blames this on a deeper-than-anticipated recession. However, a political crisis sparked by fierce rivalry among Greece's main political parties stalled the reforms for three months, and a three-party coalition finally emerged in June after two inconclusive elections.

Schaeuble said that "the problem did not arise because of flaws in the (rescue) program but because it was insufficiently implemented by Greece."

"It doesn't help to speculate now about more money or more time," he said.

Germany's vice chancellor, Economy Minister Philipp Roesler, openly questioned last week whether Greece would satisfy the conditions to receive further aid and said the prospect of a Greek exit from the euro has "lost its horror." He defended those comments in an interview broadcast Sunday.

"There can be no discounts on reforms," he told Deutschlandfunk radio. "And that means: no further payments if the reforms are not fulfilled."

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