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Dollar Up Versus Yen as Growth Slows Less Than Forecast

The euro strengthened against the dollar for the first week this month as German Chancellor Angela Merkel and French President Francois Hollande said they’ll do “everything” necessary to protect the single currency.

The greenback gained today versus the yen after U.S. economic growth slowed less in the second quarter than forecast, damping bets the Federal Reserve will take more stimulus action next week. European Central Bank President Mario Draghi will hold talks with Bundesbank President Jens Weidmann on ECB bond purchases, two central-bank officials said. The euro pared gains as investors speculated the cost of preserving it may weigh it down. The Mexican peso and New Zealand dollar climbed today.

“Anything that appears to provide some form of a near-term solution to the market’s fears around Europe should boost the euro,” Shahab Jalinoos, a Stamford, Connecticut-based senior currency strategist at UBS AG, said in a telephone interview.

The euro strengthened 1.4 percent this week, the most since February, to $1.2322. It rose as much as 0.9 percent today to $1.2390, the highest level since July 6, before trimming its gain to 0.3 percent at 5 p.m. New York time. The euro was poised for a loss of 2.7 percent for July.

The dollar was little changed against the yen on the week at 78.46. It rose 0.3 percent today. Europe’s shared currency climbed 1.3 percent against the yen on the week and appreciated 0.6 percent on the day to 96.67.

Biggest Winner

The Mexican peso was the biggest winner among major currencies, rising on optimism for exports to the U.S., its biggest trade partner, after GDP growth exceeded the forecast. The currency strengthened 1.3 percent to 13.2393 per dollar.

New Zealand’s dollar advanced as risk appetite improved and U.S. stocks and commodities rose on speculation the ECB will take steps to ease Europe’s debt crisis. The Standard & Poor’s 500 Index (SPX) rallied 1.9 percent, and the S&P GSCI Index of raw materials increased 1 percent.

The kiwi, as New Zealand’s currency is nicknamed, gained 1.1 percent to 81.06 U.S. cents, the highest level since May 3, before trading at 80.97 cents, up 1 percent.

The euro pared gains today against the dollar amid speculation that the cost of further moves to protect the currency will weaken it.

‘Severe Implications’

“The realization became for the market that if we are going this route of another round of massive bond buying, that is going to have some pretty severe implications for the ECB’s balance sheet,” Shaun Osborne, chief currency strategist at Toronto-Dominion Bank (TD)’s TD Securities unit, said in a telephone interview. “The initial movement perhaps reflected a more risk- on and dollar-negative bias, but ultimately we may get back to this weighing on the euro from a longer-term point of view.”

The 17-nation currency initially climbed after Merkel and Hollande said their countries are “bound by the deepest duty” to keep the euro area intact.

Draghi and Weidmann will meet in coming days in an effort to overcome the biggest stumbling block to a new raft of measures to stem the region’s debt crisis, including bond purchases, two central-bank officials said. They requested anonymity because the talks are private.

The ECB chief’s proposal involves Europe’s rescue funds buying government bonds on the primary market, flanked by ECB purchases on the secondary market to ensure transmission of its record low interest rates, the officials said. Further central- bank rate cuts and long-term loans to banks are also up for discussion, one of the officials said. Draghi said yesterday policy makers will do whatever is needed to preserve the euro.

People Wondering

“This is a lot to promise in a short amount of time, and people are wondering if Draghi is overreaching,” said Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York. “The market had come up a lot with short covering, and when people started to think about the news reports the air was let out of the balloon.” Short covering is buying a security to square earlier bets that it would fall.

The ECB is scheduled to meet next week. The euro has slid this year versus 14 of its 16 most-traded counterparts on concern the region’s debt crisis was worsening.

U.S. gross domestic product, the value of all goods and services produced, rose at a 1.5 percent annual rate after a revised 2 percent gain in the prior quarter, Commerce Department figures showed in Washington. The median forecast in a Bloomberg News survey was an increase of 1.4 percent.

Treasury Yields

Japan’s currency weakened versus the dollar as U.S. Treasuries fell after the GDP data, pushing two-year note yields up as much as three basis points, or 0.03 percentage point, to 0.26 percent. The extra yield investors get for investing in U.S. two-year debt versus comparable Japanese government bonds increased to the most in two weeks, enhancing dollar-denominated assets’ appeal. The yield gap was 14 basis points. It was 10 basis points on July 20, the least since February.

“It’s a yield-spread story,” Dan Dorrow, head of research in Stamford, Connecticut, at Faros Trading LLC, said in a phone interview. “Dollar-yen is one of the most sensitive currencies to yield differentials. That’s what pushing up the dollar.”

Credit Suisse AG cut forecasts for the euro, citing deterioration in the Spanish sovereign market and weak economic data. It said in a note the currency will trade at $1.17 in three months and $1.19 in 12 months, versus a prior estimate of $1.19 and $1.21. The euro will trade at 76 U.K. pence in three months, versus an earlier projection of 79 pence, the firm said.

Spanish Yields

Spanish government bond yields rose to 7.75 percent on July 25, a euro-era record, before dropping to 6.74 percent today. A composite index of euro-area purchasing managers in services and manufacturing was unchanged at 46.4 in July, London-based Markit Economics reported on July 24. A reading below 50 indicates contraction.

The Fed opens a two-day meeting on July 31. While policy makers refrained from introducing a third round of asset purchases at their session last month, Fed Chairman Ben S. Bernanke indicated that it’s an option.

The U.S. central bank purchased $2.3 trillion in securities in two rounds of a strategy called quantitative easing from 2008 to 2011 to spur the economic recovery.

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

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