Euro Hits 6-Week High; Merkel Shows Support for ECB Plan

The euro rose to a six-week high versus the yen as Germany signaled its support for a European Central Bank approach to resolve the debt crisis.

The shared currency is set to complete five-day gains against all 16 of its major counterparts before German Chancellor Angela Merkel meets French President Francois Hollande on Aug. 23 and Greek Prime Minister Antonis Samaras a day later. The yen headed for its biggest weekly loss in almost two months versus the greenback as the extra yield investors receive from U.S. securities over Japanese debt climbed. Singapore’s dollar weakened as exports rose at a slower pace.

“We’re starting to see the early signs of some real progress being made in the euro area,” said Andrew Salter, a currency strategist in Sydney at Australia & New Zealand Banking Group Ltd. (ANZ) “We do see the euro rebounding modestly over the next few months.”

The euro gained 0.1 percent to 98.18 yen as of 7:23 a.m. in London, after touching 98.19, the most since July 6. It was at $1.2362 after rising 0.5 percent to $1.2356 in New York. Japan’s currency fetched 79.41 per dollar from 79.35 yesterday, after touching 79.43, the weakest since July 12.

The euro is set to gain 0.6 percent against the dollar this week. The yen headed for a 1.4 percent loss versus the greenback, its biggest drop since the five days ended June 22.

Berlin Meetings

Merkel is due to host Hollande, Agence France-Presse reported, one day before Samaras visits Berlin for talks. Italian media reported that Prime Minister Mario Monti is due in the German capital on Aug. 29, while Spanish Prime Minister Mariano Rajoy has said that Merkel will visit Madrid on Sept. 6.

“Obviously time is pressing” on stamping out the debt crisis, though “on many of these issues we feel we’re on the right track,” Merkel told reporters in Ottawa yesterday at a joint press conference with Canadian Prime Minister Stephen Harper. Euro-area policy makers “feel committed to do everything we can to maintain the common currency.”

Asked about ECB chief Mario Draghi’s announcement that the bank may return to sovereign bond buying, Merkel said recent ECB decisions “have made it clear that the European Central Bank is counting on political action in the form of conditionality as the precondition for a positive development of the euro.”

The euro has lost 4.5 percent over the past three months, the worst performer alongside the Swiss franc among the 10 developed-market currencies tracked by Bloomberg Correlation- Weighted Indexes. The yen declined 1.8 percent and the dollar slid 1.6 percent.

Yield Gap

The difference between yields on two-year U.S. Treasuries and similar maturity Japanese government bonds was 20 basis points today, the most since July 3. Five-year U.S. government debt offered a premium of 58 basis points over comparable JGBs, up from this year’s low of 36 basis points.

“The interest-rate differential is a key driver of the dollar-yen exchange rate,” ANZ’s Salter said. “As it appears that pockets of the U.S. economy are doing better, in particular the housing sector, the bias is for Treasuries to weaken. That should put pressure on the yen.”

The yen may fall to 85 per dollar in the next three months, Masafumi Yamamoto, chief foreign-exchange strategist for Japan at Barclays Plc in Tokyo, said in an interview yesterday. This is mainly because the U.S. economy bottomed out in the second quarter and will pick up momentum in the fourth, he said.

Fed Policy

Sales of existing U.S. homes probably rose to a 4.5 million annual rate in July from a 4.37 million pace in June, according to the median estimate of economists surveyed by Bloomberg News before a report by the National Association of Realtors due Aug. 22. Housing starts fell 1.1 percent to a 746,000 annual rate last month from June’s 754,000 pace, Commerce Department figures showed yesterday.

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said he believes the Federal Open Market Committee has gone too far by pledging to hold the main interest rate near zero at least through late 2014.

“I would not have chosen to put that date as far out as the committee has chosen,” Kocherlakota said in response to an audience question after a speech in Williston, North Dakota.

U.S. central-bank officials refrained from boosting monetary stimulus at the conclusion of their last meeting on Aug. 1. The Fed bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing to cap borrowing costs. Policy makers have held the bank’s key rate in a range of zero to 0.25 percent since 2008 and plan to keep it there at least through late 2014.

Dollar Index

The Dollar Index may be set rise toward 84.10 after finding support at 82.04 earlier this month, Axel Rudolph, a senior analyst at Commerzbank AG in London, wrote in a note to clients yesterday. Support refers to an area on a chart where orders to buy may be clustered.

The gauge, which IntercontinentalExchange Inc. (ICE) uses to track the greenback against the currencies of six U.S. trading partners, last reached 84.10 on July 24. The index was little changed from yesterday at 82.41.

Singapore’s currency weakened versus its U.S. counterpart, heading for a second-straight weekly drop, after government data showed exports climbed 5.8 percent in July from a year earlier, compared with a revised 6.6 percent gain in the previous month. The Singapore dollar fell 0.2 percent to S$1.2525, extending this week’s decline to 0.7 percent.

To contact the reporters on this story: Sharon Chen in Singapore at schen462@bloomberg.net; Kristine Aquino in Singapore at kaquino1@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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