The euro strengthened against the dollar for a second week as investors pulled back on record bets against the currency before the Greek election tomorrow that may determine whether the nation remains in the bloc.
The 17-nation currency rallied amid speculation central banks may provide aid to financial markets after Spain last week became the fourth euro member to seek a rescue. The yen strengthened against the dollar after the Bank of Japan refrained from expanding monetary stimulus that debases the currency. The dollar fell versus major peers as weaker U.S. growth added to the case for further monetary stimulus from the Federal Reserve at its policy meeting next week.
“Most investors think the outcome is likely going to be a coin toss,” said Joe Manimbo, a market analyst in Washington at Travelex Global Business Payments, a currency-exchange network, referring to the Greek elections. “That leaves open the prospect for a positive outcome. Consequently, we’ve seen investors really scale back on some of those deeply bearish bets against the single currency.”
The euro rose 1 percent to $1.2638 this week in New York trading, after gaining 0.7 percent last week. The shared currency was little changed at 99.49 yen. The dollar lost 0.8 percent to 78.73 yen, reaching 78.61, the lowest level yesterday since June 6.
Hedge funds and other large speculators pared their bets on a drop in the euro against the dollar from a record high, Commodity Futures Trading Commission data showed yesterday. Futures traders decreased net euro short contracts to 195,187 in the week ended June 12, the figures showed yesterday. They reached a high of 214,418 the week ended June 5.
New Zealand’s dollar was the biggest gainer this week among the 16 major currencies tracked by Bloomberg. It rose 2.3 percent to 78.81 U.S. cents.
The Reserve Bank of New Zealand held its benchmark interest rate at 2.5 percent. Governor Alan Bollard said the exchange rate is more comfortable than March and signaled he expects to hold the 2.5 percent official cash rate till mid-2013.
Brazil’s real was the weakest performer among the major currencies, falling 1.3 percent to 2.0509 per dollar. It reduced its loss after the government pared back a tax on overseas loans as part of a bid to stem the currency’s three-month slump.
The real has lost 9 percent this year, the worst performer among 25 emerging-market currencies tracked by Bloomberg.
The euro has appreciated 2.2 percent against the dollar this month, after falling 6.6 percent in May. The median year- end estimate for the euro is $1.25, according to more than 50 economists and strategists surveyed by Bloomberg.
European central banks may coordinate action in an effort to provide liquidity to the markets, Reuters reported, citing officials linked to the Group of 20. Ministers will hold a conference call to discuss the Greek election outcome June 17, Reuters said.
European Central Bank policy makers have overcome a key concern about taking the benchmark interest rate below 1 percent, two euro-area central bank officials said.
The likelihood that such a move would also involve cutting the rate the ECB pays banks on overnight deposits from 0.25 percent is no longer an obstacle for a majority of the Governing Council, said the officials, who spoke on condition of anonymity because the deliberations aren’t public. A rate cut isn’t certain, the officials said.
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 experienced a backlash following last week’s 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.
The bailout helped move Italy, with 2 trillion euros ($2.5 trillion) of debt, to the front lines of the crisis, as bets increased Europe’s third largest economy may be the next one to succumb.
The yen strengthened the most in two weeks against the dollar yesterday 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), 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, fell 1.1 percent to 81.593, touching the least since May 23.
U.S. industrial production decreased 0.1 percent last month after a revised 1 percent gain in April, the Fed reported yesterday in Washington. 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.
Retail sales fell 0.2 percent in May, following a similar decline in April that was previously reported as a gain, the Commerce Department said June 13.
“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 disappointing data add to bets the Fed may introduce further measures to stimulate the economy. The Dollar Index fell 14 percent from December 2008 through June 2011, when the Fed bought $2.3 trillion in bonds in two rounds of quantitative easing, or QE. The central bank is also replacing $400 billion of short-term Treasuries in its holdings with longer-term debt to keep borrowing costs down.
Central-bank policy makers meet June 19-20.
To contact the editor responsible for this story: Dave Liedtka at Dliedtka@bloomberg.net