The euro gained against the dollar as European Union leaders reached an agreement that alleviated concern banks will fail and spurred optimism they are closer to resolving the region’s sovereign-debt crisis.
The dollar fell against all its major counterparts this week after EU officials during a two-day summit in Brussels dropped the requirement governments get preferred-creditor status on crisis loans to Spanish lenders. Higher-yielding currencies such as the Mexican peso and Brazilian real surged with stocks and commodities on an increased appetite for risk. The European Central Bank will lower its benchmark lending rate when it meets next week, according to a Bloomberg News survey.
“The themes this week were all around the EU summit and the anticipation that nothing of any substance was going to be resolved -- then headlines proved that to be incorrect,” Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto, said yesterday. “Commodities are rising. The impact is being seen on currencies most closely associated with this type of market environment like the Aussie, New Zealand and Canada.”
The euro rose 0.8 percent this week to $1.2667, after touching $1.2407, a three-week low, before the summit. The shared currency was little changed against the yen at 101.04. The Japanese currency rose 0.8 percent to 79.79 versus the dollar after reaching a two-month low on June 25.
Futures traders added to bets the euro would fall versus the dollar, Commodity Futures Trading Commission data showed. Net-shorts for the shared currency rose to 159,880 contracts in the week ended June 26. That compares to a record 214,418 wagers for a euro decline on June 8.
EU leaders completed yesterday their 19th summit to discuss measures to stem a debt crisis that’s spurred five euro members to seek international bailouts. Euro-bloc finance ministers will enact the deal on loans to Spanish banks at a meeting on July 9, European Union President Herman Van Rompuy said, calling the accord a “breakthrough.”
Spain’s 10-year bond yield dropped 61 basis points to 6.33 percent yesterday after falling as much as 55 basis points, the biggest decline since Dec. 5. Italy’s 10-year yield slid 38 basis points to 5.82 percent.
The European Union has “addressed the issues on the seniority of Spanish loans,” Roy Teo, a currency strategist in Singapore at ABN Amro Private Bank, said on June 29. “The fact that right now they are renouncing the seniority status means private bondholders will have similar, equal, weighting. It’s positive for the euro.”
The ECB, which has held its key rate at a record low 1 percent since December, is forecast trim it by 25 basis points, or 0.25 percentage point, when it meets on July 5, according to the median average of 57 economists in a Bloomberg News survey.
The euro still registered its biggest quarterly drop against both the yen and the dollar since September, weakening 8.6 percent versus the yen and 5.1 percent against the dollar.
The Dollar Index (DXY) touched its lowest level in more than a week yesterday. It fell 0.8 percent to 81.595 in the five-day period. The index is used by IntercontinentalExchange Inc. to track the greenback against the currencies of six U.S. trading partners.
The market’s risk-on tone has reversed recent safe-haven flows, Eric Theoret, a currency strategist in Toronto at Bank of Nova Scotia’s Scotia Capital unit, wrote yesterday in a note to clients. Bank of Japan policy, domestic fundamentals and a growing global risk appetite should push the U.S. dollar to 83 yen, according to Theoret.
The Mexican peso gained the most against the dollar this week, rising 3.6 percent to 13.3608. South Africa’s rand was next, appreciating 2.9 percent to 8.1642 per dollar.
Brazil’s real, which dropped against all of its major counterparts except the peso for the week, depreciated 2.8 percent to 2.0094 per dollar as the central bank signaled on June 28 that it will continue to cut interest rates as Europe’s debt crisis and sluggish demand lead to slower economic growth.
The currency pared weekly losses after Brazil’s central bank offered 60,000 currency swap contracts worth $3 billion on June 29.
“It’s starting to break 2 at this point and it might do it,” Ilan Solot, a London-based strategist at Brown Brothers Harriman & Co., said in a telephone interview. “The swap might have been the biggest factor on the margin that led to this.”
The real has posted a risk-adjusted gain of 0.55 percent versus the greenback this year to lead gainers, the data show, while the yen’s risk-adjusted gain of 0.45 percent is second best. The euro’s loss of 0.26 was the third worst performance, after the Singapore and Taiwan dollars.
The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.
The euro has declined against 13 of its 16 most-traded counterparts this year, with the Mexican peso’s 6.7 percent rise leading gainers. The greenback gained 2.3 percent versus the euro. The yen fell 1.4 percent, the biggest decline after the Brazilian real’s 4.9 percent plunge.
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