The euro gained the most in two weeks against the dollar as renewed optimism European leaders are taking steps to contain the region’s sovereign-debt crisis spurred appetite for risk.
The 17-nation currency rose as former European Central Bank Vice President Lucas Papademos was sworn in as prime minster of Greece and as Italy’s Senate approved a debt-reduction bill. The yen reached its strongest level versus the dollar since Japan intervened last month to weaken it. The Australian and New Zealand dollars climbed against the greenback.
“This is a small sigh of relief that you have the Italian Senate passing the austerity measures and a new government coming into place in Greece,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. “It’s a risk-on day: emerging-market currencies have rallied, commodities have rallied, equity markets have rallied.”
The euro strengthened 1.1 percent to $1.3750 at 5 p.m. New York time, paring a weekly drop to 0.3 percent. It climbed today as much as 1.4 percent, the most since Oct. 27, when European leaders agreed to expand a rescue fund for indebted nations and reached an accord with lenders on writedowns for Greek debt. The shared currency gained 0.4 percent to 106.10 yen, trimming its five-day loss to 1.7 percent.
Strongest Since Oct. 31
The Japanese currency appreciated 0.6 percent to 77.20 versus the dollar and touched 77.05, the strongest level since Japan sold yen Oct. 31.
Stocks gained, with the Standard & Poor’s 500 Index climbing 2 percent. The S&P GSCI Index of raw materials increased 0.7 percent.
Australia’s dollar gained 1.2 percent to $1.0276, and New Zealand’s dollar, called the kiwi, was up 1 percent to 78.53 U.S. cents.
The higher-yielding currencies extended gains after confidence among U.S. consumers rose more than projected this month. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment climbed to 64.2, the highest level since June, from 60.9 in October. The dollar fell against all of its 16 most-traded counterparts.
The euro rose versus a majority of its major peers as Italy’s 10-year government bond yield declined to as low as 6.43 percent, the least in four days. The rate soared on Nov. 9 to as high as 7.48 percent, exceeding the 7 percent level that led Greece, Ireland and Portugal to seek international bailouts.
Italy’s Chamber of Deputies will give final approval to the austerity legislation tomorrow and Prime Minister Silvio Berlusconi will resign “a minute later,” Chamber Speaker Gianfranco Fini said. The new government may be led by former European Union Competition Commissioner Mario Monti.
President Giorgio Napolitano met Monti yesterday in Rome for a “courtesy visit” a day after making him a senator for life, which will grant him voting rights in the Senate.
“The speculation is that we could move to a more technocratic government forming, similar to what we’re seeing in Greece, which could be seen as positive development if it increases confidence in the Italian government’s ability to put in place credible fiscal consolidation,” said Lee Hardman, a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London.
Greek Finance Minister Evangelos Venizelos will remain in his post in the new coalition government headed by Papademos, which is charged with the immediate task of securing funds to avert an economic collapse. Venizelos will also be deputy premier, according to an e-mailed statement today from the press ministry in Athens.
Goldman Sachs Group Inc. recommended buying the euro. Morgan Stanley said it’s time to sell it against the dollar.
Emergence of new governments in Italy and Greece suggests “euro-zone fiscal tensions could continue to decline, at least for a period of time,” wrote Thomas Stolper, Goldman’s London- based chief foreign-exchange strategist, in a note. Investors should target $1.40 and exit the trade if the euro falls to $1.35, according to the note.
Morgan Stanley said the euro may fall to $1.30, wrote analysts led by Hans Redeker, head of foreign-exchange strategy in London. “Political uncertainties” and Italian bond yields that remain above 6 percent leave the firm “fundamentally bearish” on the euro “as Italy runs the risk of being too big to save,” the firm said in a client note. Traders should sell the euro, targeting $1.3050, and end the bet if it rises to $1.3950.
Federal Reserve Vice Chairman Janet Yellen said recent financial market turmoil underscores the need for “forceful action” by European leaders to curb the debt crisis.
U.S. banks “have manageable levels of direct exposure to the peripheral European countries but more substantial links to financial institutions in the larger European economies,” she said today in a speech in Chicago. The central bank will do everything it can to limit harm to the U.S., she said.
The dollar gained 4.1 percent over the past three months and the yen appreciated 1.9 percent in a basket of 10 developed- nation currencies tracked by Bloomberg Correlation-Weighted Currency Indexes. The euro rose 0.5 percent.
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