Euro Heads for Biggest Weekly Gain in Year as European Debt Concerns Ease

The euro headed for its biggest weekly advance against the dollar in a year as stock markets rose amid signs Europe is emerging from its debt crisis.

The 16-nation currency touched a three-week high versus the greenback as increased demand at a Spanish bond auction yesterday spurred optimism that nations in the region can raise sufficient funds. The pound headed for its second weekly gain versus the dollar after a report showed Britain posted a smaller fiscal deficit in May than economists predicted.

“The market will likely try to hold on to what has been achieved in the euro this week,” said Steven Barrow, head of Group of 10 foreign-exchange research at Standard Bank Plc in London. “But I take no confidence in the idea that markets are ignoring the bad news out of the euro zone.”

The euro traded at $1.2391 as of 9:58 a.m. in London from $1.2389 in New York yesterday, after earlier rising to $1.2417, the highest level since May 28. The currency has advanced 2.3 percent this week, the most since the period ended May 22, 2009. The single currency traded at 112.45 yen from 112.76 yen. The yen climbed to 90.75 per dollar from 91.01 yesterday.

Spain’s Auction

The euro gained versus 13 of its 16 most-traded counterparts this week after Spain sold 3 billion euros ($3.71 billion) of 10-year debt yesterday at an average yield of 4.864 percent, less than the 5.04 percent yield on the benchmark before the sale. The MSCI World Index of global stocks rose 0.3 percent today, extending its run to nine consecutive days, the longest streak since July, 2009.

Spain also sold 30-year debt at 5.908 percent, with a so- called bid-to-cover ratio of 2.45, higher than the 1.38 at the previous sale on March 18.

“The Spanish bond auction was better than expected, providing a boost to risk appetite and allowing the euro-dollar to break the $1.2350 resistance,” analysts led by Hans-Guenter Redeker, London-based global head of currency strategy at BNP Paribas, wrote in a research note today, referring to a level at which sell orders may be clustered.

European Union leaders yesterday agreed to disclose how banks perform on stress tests, seeking to show investors the financial system can withstand financial shocks. The euro will fall back to $1.20 within a “few weeks,” Barrow said.

The pound rose 0.3 percent to $1.4866 and was up 2.2 percent for the week, as the 16 billion-pound ($23.8 billion) budget shortfall in May compared with 17.4 billion pounds a year earlier. The result was below the 18 billion-pound median forecast in a Bloomberg News survey.

‘Structural Reforms’

Japan’s currency was poised for a second weekly gain versus the dollar after Japanese Prime Minister Naoto Kan pledged to cut the world’s largest public debt. Kan said he’d consider an opposition party proposal to raise the consumption tax.

“The structural reforms appear to be aimed at securing funding sources” for Japan, said Yuji Saito, director of the currency department in Tokyo at Credit Agricole Corporate and Investment Bank, a unit of France’s largest lender by branches. “This is likely to be positive for the yen.”

The ruling Democratic Party of Japan, in an election document distributed yesterday, called for cross-party talks on raising the country’s 5 percent consumption tax. Japan pledged in its medium-term economic plan today to reduce its corporate tax of 40.7 percent and nurture the environment and healthcare industries to help end two decades of economic stagnation.

“Unless we work on fiscal rehabilitation, an international organization such as the International Monetary Fund could control our fiscal management,” Kan said yesterday. “We must rehabilitate our finances with our own power without relying on other countries.”

Asian Currencies

Asian currencies were led higher by South Korea’s won and the Philippine peso as signs the global economic recovery will withstand Europe’s debt crisis boosted demand for riskier assets.

The Bloomberg-JPMorgan Asia Dollar Index and the MSCI Asia Pacific Index of shares were headed for their biggest gains this year. The Conference Board this week said its leading indicator of China’s economy rose the most in 14 months. Thailand reported its best export growth in almost two years.

“There has been optimism that the impact of Europe’s problems on the Asian economy may be limited, supporting the purchase of regional currencies,” said Minori Uchida, a senior analyst in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s biggest bank. “Gains in stocks are also a supporting factor.”

The won rose 0.9 percent to 1,202.65 per dollar and Indian rupee rose 0.3 percent to 46.1556. The Bloomberg-JPMorgan index, which tracks the region’s 10 most-traded currencies excluding the yen, gained 0.8 percent this week.

To contact the reporter on this story: Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.

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