Euro Gains Versus Dollar Amid Speculation Before Greek Election

The euro strengthened against the dollar for a second week as investors reduced record bets against the currency before Greece’s June 17 election, and amid speculation central banks may provide aid to financial markets.

The 17-nation currency erased earlier losses against the dollar on concern its decline since April has been overdone. Central banks are preparing for coordinated action to provide liquidity, if needed, after a general election in Greece in two days, Reuters reported. The dollar headed for weekly declines versus major peers as weaker U.S. growth added to the case for further monetary stimulus from the Federal Reserve.

“The market has been paring back on their short euro positions,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp. “The market is severely short euros still. Because the uncertainty surrounding the elections, market players wish, going into the weekend, to be more neutral in their positioning.” A short is a bet the price of an asset will fall.

The euro was little changed at $1.2638 at 5 p.m. in New York, pushing its weekly gain to 1 percent. The currency fell 0.8 percent to 99.49 yen. The dollar lost 0.8 percent to 78.73 yen, reaching the biggest drop since May 31.

Real Rises

Brazil’s real strengthened as speculation increased that global central banks would coordinate action following the Greek elections, a move that may boost appetite for higher-yielding assets.

The real rose 0.2 percent to 2.0509 per dollar.

“It is the ultimate risk-aversion trade to take long dollar positions in the face of global adversity, so anything that suggests otherwise would see liquidation of long dollar positions,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “The global response in the form of coordinated action is beginning to kick in.”

Hedge funds and other large speculators pared their bets on a drop in the euro against the dollar last week from a record high, Commodity Futures Trading Commission data showed.

Futures traders decreased net euro short contracts to 195,187 in the week ended June 12, the figures showed. They reached a high of 214,418 the week ended June 5.

The shared currency has appreciated 2.2 percent against the dollar this month, after falling 6.6 percent in May.

Greece Votes

Greeks will vote for the second time in six weeks after a May 6 ballot failed to yield a government. The final opinion polls showed no party set to win a majority. Exit polls will be released when voting ends at 7 p.m. in Athens, with a first official result estimate due around 9:30 p.m. The elections will be followed by meetings by Group of 20 policy makers on June 18- 19.

The elections may determine whether Greece upholds austerity conditions attached to international aid, tries to renegotiate the terms or abandons the pledge and risks what would be the first departure from the euro bloc. Spain on June 9 became the fourth of 17 members to request a bailout.

“If you have negative news from Greece, it’s negative for Spain, but if you have positive news from Greece, Spain still has issues,” said Jose Wynne, head of North America foreign- exchange research at Barclays Plc in New York. “A weaker euro will be part of any solution for Europe. We would only be switching gears if we saw a lot of central bank intervention.”

Spain’s Debt

Spain experienced a backlash following last week’s 100 billion euro ($126 billion) bailout. The country’s bonds slumped, with 10-year yields rising to a euro-era record, after Moody’s Investors Service cut the nation’s credit rating to one step above junk, citing its rising debt burden and weakening economy.

Wynne said the euro may appreciate to $1.27 or $1.2750 should the pro-bailout New Democracy party garner a majority of votes in the Greek election. He recommended then selling the currency, as it won’t gain beyond that level.

The yen strengthened the most in two weeks against the dollar after the Bank of Japan refrained from expanding monetary stimulus that debases the currency. The central bank kept its asset-purchase fund at 40 trillion yen ($510 billion) today, matching the forecasts of 13 economists surveyed by Bloomberg News.

The Dollar Index (DXY), which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, slipped for a fourth day, falling as much as 0.6 percent to 81.481, the least since May 22. It was down 1.1 percent for the week.

Economic Data

U.S. industrial production decreased 0.1 percent last month after a revised 1 percent gain in April, the Fed reported today in Washington. Economists forecast a 0.1 percent advance, according to the Bloomberg News survey median. Manufacturing, which makes up about 75 percent of total production, dropped 0.4 percent last month.

The Thomson Reuters/University of Michigan preliminary index of consumer sentiment for June fell to 74.1 from 79.3 at the end of last month.

“Weak data does encourage expectations of some easing from the Federal Reserve next week,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “We’ve certainly seen a string of softer data in the U.S. If I were to pick a currency that would benefit from softer U.S. numbers at this point it would probably be the yen.”

The Fed bought $2.3 trillion of bonds in two rounds of so- called quantitative easing from 2008 through 2011 to stimulate the economy through lower borrowing costs. Central bank policy makers meet on June 19 and 20.

The Australian dollar is facing a “key test” as it reaches a 50 percent retracement of $1.0028 from the April 27 high to the June 1 low, according to Niall O’Connor, a technical analyst in New York at JPMorgan Chase & Co. An advance above $1.0135 would imply a “better tone” and potential for a bigger gain, O’Connor wrote in a research note yesterday.

The Aussie gained 0.3 percent to $1.0056.

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Joseph Ciolli in New York at jciolli@bloomberg.net

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