The euro rose for the first time in seven weeks versus the yen on speculation Spain may receive aid to ensure access to capital markets and amid indications the shared currency’s decline was too rapid.
The 17-nation euro rallied against the dollar as European Central Bank President Mario Draghi said policy makers were “ready to act” after leaving their benchmark rate at a record low. The greenback declined after China cut its key interest rates for the first time since 2008, damping appetite for refuge assets. European finance ministers will hold a conference call today to discuss potential emergency assistance plan for Spain.
“The euro can’t fall forever,” said Blake Jespersen, director of foreign exchange in Toronto at Bank of Montreal. “There was bound to be some profit-taking at some point, or some hope that Europe would finally embrace the euro bond, or more importantly, the bank recapitalization from Spain.”
The euro rose 2.5 percent to 99.47 per yen, its first weekly increase since April 20. The shared currency gained 0.7 percent to $1.2517 for its first rise against the greenback in six weeks. The yen lost 1.9 percent to 79.49 per dollar.
Futures traders increased net bets against the euro versus the dollar to a record high for a fifth week. So-called net shorts rose by 11,000 to 214,418 contracts for the period ended June 5, Commodity Futures Trading Commission data showed yesterday.
The 14-day relative strength index for the euro versus the dollar rose above 30 on June 4 for the first time in nine days, ending the longest streak since 2008. When the index moves below 30 it indicates an asset’s decline may have been overdone.
Currencies of commodity-exporting countries rose after China cut interest rates. The country’s one-year deposit and lending rates were decreased by 0.25 percentage points to counter what Premier Wen Jiabao has called increasing downward economic pressure.
The Australian dollar rallied above parity with the greenback on June 7 for the first time since May 15. The Aussie rose 2.2 percent to 99.16 U.S. cents. China is Australia’s largest trading partner.
The Mexican peso climbed 2.7 percent to 13.9212, its biggest gain since the week ended Jan. 20.
“The way it’s played out is through a positive move in risk appetite,” Adam Cole, global head of foreign-exchange strategy in London at Royal Bank of Canada’s RBC Capital Markets, said in a June 7 interview.
“The situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely,” Bernanke said in testimony to the Joint Economic Committee in Washington. “As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate.”
The policy-setting Federal Open Market Committee meets June 19-20.
The Dollar Index (DXY), which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, fell 0.5 percent to 82.439. It touched 81.911 on June 7, the lowest level since May 28.
Canada’s dollar rose against most major currencies even as a jobs report showed employers in May added the fewest jobs in three months. The country also recorded its first merchandise trade deficit in six months in April as exports declined.
Bank of Canada policy makers led by Governor Mark Carney held their key interest rate at 1 percent on June 5 and said the country’s underlying economic momentum is in line with projections, even after first-quarter growth that trailed their earlier forecast. The central bank also said that tensions from Europe’s debt crisis have increased while the prices of exported commodities have eased.
The so-called loonie rose 1.4 percent to C$1.0266, snapping five weekly declines.
The ECB’s Draghi said during a June 6 press conference in Frankfurt that officials will extend their offerings of unlimited cash to banks until the start of 2013 for periods up to three months as they endeavor to counter risks stemming from the region’s debt crisis.
The ECB’s decision to keep its benchmark rate unchanged was forecast by 49 of 60 economists surveyed by Bloomberg News. Ten forecast a quarter-percentage-point reduction, and one a half- point cut.
“The market is starting to anticipate what action we could see from policy makers,” Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London, said in a June 6 interview. “We’re starting to see the safe-haven currencies of the dollar and the yen give back some of their strong recent gains. It’s more hope than anything that is driving the more favorable market dynamics” for the euro.
The euro received support as Jean-Claude Juncker, who leads the group of euro-area finance ministers said Spain would get euro-area bank aid. The nation’s short-term debt was downgraded to F2 from F1 by Fitch Ratings on June 7. Its long-term outlook was negative.
The 17-nation currency touched to a two-week high versus the dollar on June 7 as German Chancellor Angela Merkel said the nation is ready to back euro-area financial instruments. Merkel didn’t specify which financial instruments she was discussing.
The shared currency has fallen 3.9 percent during the past six months, the worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 3.1 percent, and the yen advanced 0.5 percent.
The euro will strengthen to $1.26 by year-end, according to the average analyst estimate in a Bloomberg News survey.
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