Euro Gains for First Time in Seven Weeks as Region’s Borrowing Costs Fall

The euro rose for the first time in seven weeks after bets the 17-nation currency would weaken reached a record and as member nations’ borrowing costs fell at bond auctions, mitigating debt-crisis pessimism.

The Dollar Index declined for the first time in four weeks as better-than-forecast U.S. economic data fueled demand for higher-yielding assets. Mexico’s peso and Sweden’s krona led gains against the dollar among major currencies after the International Monetary Fund proposed raising its lending capacity to protect the global economy. The Federal Reserve is projected to keep its benchmark interest rate target unchanged at a policy meeting next week.

“The development with European borrowing costs, how they continued their descent, that took some pressure off the single currency,” said Joe Manimbo, a market analyst in Washington at Travelex Global Business Payments, a currency-exchange network. “Talk that the IMF is considering a bigger lending facility to help protect the global economy helped fan risk appetite.”

The euro rose 2 percent to $1.2931, the biggest weekly gain since Oct. 14. It reached $1.2986 yesterday, the highest level since Jan. 4. The common currency appreciated 2.1 percent to 99.62 yen, after reaching an 11-year low of 97.04 yen Jan. 16. The dollar was little changed against the yen at 77.01.

Dollar Path

The Dollar Index (DXY), which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, fell 1.6 percent to 80.157. It touched 79.999, its lowest level since Jan. 4.

The Mexican peso rose 3.1 percent to 13.1813 per dollar. It has gained 5.7 percent since December, the best start to the year since the government reset its nominal value in 1993.

Mexico’s central bank kept its benchmark lending rate unchanged for the 24th consecutive meeting yesterday as slower economic growth failed to head off a pick-up in inflation.

Sweden’s krona added 3 percent to 6.7826 per dollar.

Higher-yielding currencies, including the euro, pared their weekly advances yesterday as speculation mounted the rallies were overdone.

“What we’ve seen this week has been more of short-covering and not longs being put on,” said George Dowd, head of Chicago foreign exchange for Newedge USA LLC, an institutional brokerage firm. “The rally this week was more technical and not a bullish indicator. The rally in the euro of the last few days has been more of a correction from an oversold condition.” Short positions are bets that an asset will decline in value, while long positions are wagers on an increase.

Futures, Options

The difference in the number of futures and options wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 160,030, the most ever, according to figures as of Jan. 17 from the Washington-based Commodity Futures Trading Commission. That compared with net shorts of 155,195 a week earlier.

The euro also weakened yesterday as Greek officials conducted a third day of debt-swap talks with private bondholders. The group had agreed in October to carry out a 50 percent cut in the face value of the nation’s debt by voluntarily exchanging outstanding bonds for new securities, with a goal of reducing the country’s borrowings to 120 percent of gross domestic product by 2020.

“The euro remains a very vulnerable currency,” said Jane Foley, a senior currency strategist at Rabobank International in London. “There is still an awful lot to be done in Greece. Politically, nothing has changed since last year, and there’s still a lot of pain to come. I am still quite wary about this upside we’ve seen in the euro.”

Sovereign Borrowers

The euro’s weekly advance came as Spain, Greece and the region’s bailout fund sold bonds at lower rates than at previous auctions, even after Standard & Poor’s downgraded nine euro area countries last week and the rescue fund earlier this week.

Spain sold 6.61 billion euros ($8.6 billion) of debt due in 2016, 2019 and 2022 Jan. 19, exceeding the maximum target of 4.5 billion euros set for the auctions. Greece sold 1.625 billion euros of 13-week bills with a yield of 4.64 percent Jan. 17, down from 4.68 percent on Dec. 20.

Borrowing costs for France, which lost its AAA rating from S&P Jan. 13, declined as the nation sold 7.97 billion euros of medium and long-term securities.

Europe’s rescue fund, the European Financial Stability Facility, which had its rating cut to AA+ from AAA Jan. 16 by S&P, got bids for 4.66 billion euros of 182-day bills the following day. That was more than triple its sales target of 1.5 billion euros.

IMF Funding

The euro was also supported after the IMF proposed raising its lending capacity by as much as $500 billion on Jan. 18. The Washington-based lender wants to increase its resources after identifying a potential need for $1 trillion in coming years, a spokesman said in a statement.

The shared currency weakened 4.7 percent in the past year, according to Bloomberg Correlation-Weighted Indexes. The yen rose 6.2 percent and the dollar fell 0.6 percent.

Australia’s dollar advanced for a fifth straight week against the dollar, reaching a 10-week high of $1.0484 yesterday. It was boosted after China said its economy expanded 8.9 percent in the fourth quarter from a year earlier, compared with a Bloomberg News survey that forecast growth of 8.7 percent. China is Australia’s biggest trading partner.

Factory Output

Manufacturing in the New York region expanded in January at the fastest pace in nine months. The Fed Bank of New York’s general economic index rose to 13.5, the highest level since April, from a revised 8.2 in December. A Bloomberg survey projected the gauge would rise to 11. Readings higher than zero signal expansion.

The U.S. consumer price index was little changed for a second month, Labor Department data showed today in Washington. That compared with a median forecast of a 0.1 percent gain in a Bloomberg News survey of economists. Excluding volatile food and fuel costs, the so-called core rose 0.1 percent as projected.

Other reports showed fewer Americans than forecast filed applications for jobless benefits last week and U.S. housing starts dropped 4.1 percent to a 657,000 annual rate last month.

“We’re still seeing generally positive U.S. data, while Europe continues to struggle and is likely headed for a recession, but the euro has taken something like a breather from the massive fall it had in December,” said John Doyle, director of markets in Washington at currency-trading firm Tempus Consulting Inc.

The Fed’s rate-setting committee meets Jan. 24-25. It has indicated it will keep the benchmark rate at a record low through at least mid-2013.

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.