The euro reached a two-month high against the dollar and the yen after Greek political leaders said they had reached an agreement on austerity measures needed to obtain a bailout.
The 17-nation currency strengthened against the majority of its most-traded counterparts after European Central Bank President Mario Draghi said it would lower the collateral requirements to access the next three-year loan auction later this month. The yen sank against higher-yielding counterparts as implied volatility for Group of Seven currencies fell to an 11- month low.
“The euro’s up on a combination of Greece and what the ECB has done in terms of reducing the collateral requirements and boosting expectations for the LTRO, which is supportive of risk appetite,” Mark McCormick, a New York-based currency strategist at Brown Brothers Harriman & Co., said referring to the ECB’s long-term refinancing operation. “The market has been very short euros and most of these shorts are getting squeezed out.” A short is a bet an asset will fall.
The euro gained 0.2 percent to $1.3286 at 5 p.m. in New York after rising to $1.3322, the strongest since Dec. 12. The common currency added 1 percent to 103.19 yen after reaching 103.29 yen, the highest since Dec. 12. The yen dropped 0.8 percent to 77.67 per dollar.
“Discussions between the Greek government and the troika were successfully completed this morning,” according to a statement from the Greek prime minister’s press office, referring to the group comprising the European Commission, European Central Bank and International Monetary Fund.
The accord came as euro-region finance ministers held an emergency meeting in Brussels to discuss the 130 billion-euro ($173 billion) aid package. Luxembourg’s Jean-Claude Juncker, who leads the group, said there will be no final decision on Greece’s bailout package at the meeting.
“It’s up to the Greek government by concrete actions -- through legislation, other actions -- to convince its European partners that the second program can be made to work,” European Union Economic and Monetary Affairs Commissioner Olli Rehn said today as he arrived for the meeting.
The seven-day relative strength index for the euro versus the dollar was 72.5, above the 70 level for the third consecutive day. A reading above 70 indicates an asset may be due for a correction.
The euro has risen 0.8 percent in the past week according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar dropped 0.3 percent, and the yen declined 1.8 percent.
ECB Holds Steady
“People are really gun-shy to buy euros aggressively because we still have the Greek parliamentary vote, a German vote, a number of hurdles to clear,” said Kathy Lien, director of currency research in New York with the online currency trader GFT Forex. Expanding collateral “is bad news because the ECB is taking riskier and more dangerous assets on to their balance sheet.”
The ECB maintained its main refinancing rate at 1 percent, in line with the estimates of 55 of 57 analysts in a Bloomberg News survey. The other two predicted a cut to 0.75 percent. The rate was also held at 1 percent at the bank’s last meeting, following quarter-point reductions in November and December.
The Dollar Index (DXY), which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, dropped 0.2 percent to 78.597 after falling to 78.364, the lowest since Dec. 8. The gauge is weighted 57.6 percent to movements in the euro.
The U.S. didn’t buy or sell dollars to affect foreign- exchange rates in the fourth quarter, the Federal Reserve Bank of New York said in a report to Congress today.
The yen fell against all its major counterparts as cumulative outflows in Japan’s currency were almost twice as strong today as the daily average in the past year, according to Bank of New York Mellon iFlow data.
Implied volatility of three-month options for Group of Seven currencies fell to 9.9 percent, an 11-month low, according to the JPMorgan G7 Volatility Index. A decrease makes investments in currencies with higher benchmark lending rates more attractive as the risk in such trades is that market moves will erase profits.
“While full details of the Greek debt restructuring, austerity measures and subsequent release of rescue funds are still awaited, currency investors are clearly choosing to view the glass half-full,” Samarjit Shankar, a managing director for the foreign-exchange group in Boston at Bank of New York Mellon, wrote to clients.
The pound rose toward the highest since November against the dollar after the Bank of England said it would increase its bond-buying program by less than some economists forecast.
The Monetary Policy Committee raised the target for bond purchases by 50 billion pounds ($79.3 billion) to 325 billion pounds, more than a quarter of current outstanding gilts.
“Today’s developments have been beneficial for the pound,” Michael Derks, chief strategist at broker FXPro Financial Services Ltd. in London, wrote in a note to clients. “The BOE’s preparedness to continue to engage in responsible monetary accommodation is gaining it some plaudits at this time of unprecedented fiscal austerity.”
The pound traded at $1.5818 after rising to $1.5929 yesterday, the highest since Nov. 15. Sterling fell 0.2 percent to 84 pence per euro.
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