Euro Advances on Speculation Greece’s Deficit Crisis Contained

March 11 (Bloomberg) -- The euro rose against most of its major counterparts as German government bonds dropped to the lowest level in more than two weeks on optimism Greece’s budget- deficit crisis has been contained.

The dollar strengthened against its New Zealand counterpart amid speculation China will seek to damp economic growth and a report showed U.S. imports and exports fell in January, diminishing demand for risky assets. Switzerland’s franc fell versus the euro after the Swiss central bank reiterated its readiness to counter “excessive” gains in the currency and left the benchmark interest rate near zero.

“There’s been a lot of stabilization in Greece,” said Camilla Sutton, a Bank of Nova Scotia currency strategist in Toronto. “Every day we’re moving slowly higher. That’s a good sign for the euro generally.”

The 16-nation currency appreciated 0.2 percent to $1.3678 at 4:35 p.m. in New York, from $1.3657 yesterday. The euro rose 0.2 percent to 123.82 yen, from 123.62. The greenback was little changed at 90.51 yen, compared with 90.52.

The yield on the 10-year German bund touched 3.2 percent today, the highest level since Feb. 23, after reaching 3.11 percent two days ago, a signal investors are seeking riskier assets as Greece tackles its debt woes. Greece has a budget shortfall that, at 12.7 percent of gross domestic product, was the European Union’s largest in 2009.

Volatility Falls

One-month implied volatility on euro-dollar options fell to a three-month low today, after approaching a two-month low yesterday. Traders expect swings of 9.54 percent, the least volatile since Dec. 12, according to Bloomberg data. Reduced volatility indicates less probability of currency fluctuations that may erode profit on investments.

Harvard University Professor Martin Feldstein said the euro’s 4.5 percent decline against the dollar this year has been “panic selling” stemming from the Greek crisis.

“The euro is weakening despite their better trade balance,” Feldstein, an economist, said in a Bloomberg Television interview broadcast today. “This is a kind of an irrational or panic selling where people are just saying, ‘I don’t know what is going on, I am just going to step to the sidelines and not leave money in euros.’”

The European currency has depreciated 3.2 percent this year measured against a basket of Group-of-10 currencies proportioned by how correlated they are with each other, according to Bloomberg Correlation-Weighted Currency Indices.

Goldman Sachs Group Inc. cut its forecasts for the euro against Norway’s krone, the Swiss franc, the Swedish krona and Polish zloty, citing an “increasing focus on growth differentiation.”

Chinese Inflation

Consumer prices in China rose 2.7 percent in February from a year earlier, the National Bureau of Statistics said in Beijing today. It was the fastest in 16 months and compared with a 2.5 percent median estimate of 29 economists surveyed by Bloomberg News.

The U.S. trade deficit decreased 6.6 percent in January to $37.3 billion from a revised $39.9 billion the previous month as Americans imported the fewest barrels of crude oil in a decade, Commerce Department figures showed. Exports decreased 0.3 percent, the first decline since April, on fewer shipments of commercial aircraft and autos.

“The contraction in imports and exports does not play into the growth story,” said Kathy Lien, director of currency research at online currency trader GFT Forex in New York. “That’s why risk currencies are selling off.”

Swiss Franc

The franc weakened against the euro after the Zurich-based Swiss National Bank kept the three-month Libor target rate at 0.25 percent at its quarterly assessment. That was in line with the forecast of all 19 economists in a Bloomberg News survey.

The Swiss currency slipped as much as 0.2 percent to 1.4631 per euro before trading little changed.

The zloty fell for a third day against the euro, dropping 0.5 percent to 3.90 to the 16-nation currency, after Deputy Central Bank Governor Piotr Wiesiolek told PAP newswire that policy makers are operationally ready to intervene on the foreign-exchange market if necessary. Central banks intervene by purchasing or selling currencies to influence exchange rates.

New Zealand’s dollar fell 0.2 percent to 70.08 U.S. cents and slipped 0.1 percent against the yen to 63.44. Reserve Bank Governor Alan Bollard left the nation’s benchmark interest rate at a record low of 2.5 percent and said economic growth may remain subdued.

The dollar will retain its status as the world’s reserve currency as long as U.S. financial markets are sound and government spending is sustainable, Standard & Poor’s said.

The greenback is “the world’s most accepted currency,” even after the global recession that began in the U.S., John Chambers, chairman of the S&P sovereign ratings committee, wrote in a report released today.

To contact the reporter on this story: Ben Levisohn in New York at blevisohn@bloomberg.net