Euro Declines Versus Dollar as ECB Said to Await German Ruling

The euro snapped four days of gains against the dollar after the European Central Bank’s plan to buy government bonds was said to be held up until a German court rules on Europe’s permanent bailout fund.

The greenback pared an advance after Federal Reserve Chairman Ben S. Bernanke said he sees “scope for further action” in a letter defending monetary stimulus, which would debase the currency. Chancellor Angela Merkel said she wants Greece to stay in the monetary union and that Germany is ready to help the Greek government as it takes the necessary steps to resolve its economic woes. Australia’s dollar fell after Reserve Bank Governor Glenn Stevens said the currency would probably depreciate if a mining boom ends.

“The ECB is looking to the sovereigns to make sure that they take the onus, take the lead,” Brian Kim, a currency strategist at Royal Bank of Scotland Group Plc in Stamford Connecticut, said in a telephone interview. “The ECB is saying, ‘Once you guys have your stuff in order, we’ll be behind to help.’”

The euro dropped 0.4 percent to $1.2512 at 5 p.m. in New York. It climbed to $1.2590 yesterday, the strongest since July 4. The euro fell 0.2 percent to 98.44 yen. The dollar strengthened 0.2 percent to 78.67 yen.

The single currency still gained 0.8 percent on the week, the biggest increase along with the Swiss franc and Norwegian krone among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The U.S. dollar fell 0.8 percent and the yen added 0.4 percent. Canada’s dollar dropped 1.2 percent to lead decliners.

Aussie, Pound

Australia’s dollar fell for a second day against the U.S. currency as Stevens said in testimony to a parliamentary panel that the nation’s resource investment boom will peak “within the next year or two.”

The so-called Aussie dropped 0.4 percent to $1.0403 after depreciating 0.6 percent yesterday. It fell 0.2 percent for its second weekly decline.

The pound dropped for a second day against the dollar after a government report showed the U.K. economy contracted in the second quarter.

Sterling weakened 0.3 percent to $1.5810, trimming its weekly gain to 0.7 percent.

The rand tumbled to the lowest in three weeks and bond yields rose after Fitch Ratings said violence at South Africa’s mines shows problems that may weigh on its credit ratings.

South Africa’s currency declined 1.1 percent to 8.4003 per dollar after touching 8.4228, the weakest level since Aug. 2. It dropped 1 percent for a second weekly decline.

Bernanke Letter

The Fed has the ability to take additional steps to boost the economy, Bernanke said in a letter dated Aug. 22 to California Republican Darrell Issa, the chairman of the House Oversight and Government Reform Committee

“There is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery,” Bernanke wrote.

Minutes of the U.S. central bank’s latest policy meeting released Aug. 22 showed officials remain supportive of a third round of asset purchases under quantitative easing as unemployment has been mired at more than 8 percent since 2009. The central bank purchased $2.3 trillion of Treasury and mortgage-related debt from 2008 to 2011 to cap borrowing costs.

“The direct explanation is that we’re following equity markets,” Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York, said of the dollar’s paring. “U.S. equities seem to have navigated those European headline and are higher on the day, which is hurting the dollar and helping foreign currencies.”

The Standard & Poor’s 500 Index (SPX) gained 0.7 percent after falling as much as 0.3 percent.

‘Follow Momentum’

“There’s just a whole lot of chatter and the chatter’s moving the market,” Brian Taylor, chief currency trader at Manufacturers & Traders Trust in Buffalo, New York, said in a telephone interview. “Traders are just searching for reasons to either jump on board and follow momentum or to get out of positions they’re holding.”

The 17-nation currency fell as much as 0.7 percent, the most in two weeks, after two central bank officials said ECB President Mario Draghi may wait until Germany’s Constitutional Court rules on the legality of Europe’s fund on Sept. 12 before unveiling details of his plan to buy government bonds. An ECB spokesman in Frankfurt declined to comment.

‘Deeply Convinced’

The ECB president announced on Aug. 2 that the central bank may intervene in the secondary market to reduce bond yields in countries such as Spain and Italy if they apply to Europe’s bailout fund for aid and accept the conditions attached.

Merkel said Germany is ready to help Prime Minister Antonis Samaras’s government as it takes the necessary steps to resolve his country’s economic woes.

“I want Greece to stay in the euro zone and that’s what I’m working for,” Merkel told reporters in Berlin today at a joint press conference with Samaras. “I am deeply convinced that the new government under the leadership of Prime Minister Samaras will do what it takes to solve the problem in Greece.”

Spanish Prime Minister Mariano Rajoy will hold a working lunch with Merkel on Sept. 6 as the ECB governing council meets to work on the details of a mechanism to lower borrowing costs for peripheral euro members.

“There’s a broad framework that’s being negotiated that has many hurdles,” Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in New York, said in a telephone interview. “We’ve had a good retracement on the euro dollar since the bottom in July and people have failed to see a break of the 50-day moving average. Therefore, news that reinforces the negative view on the euro is going to have more impact.”

Net Shorts

Futures traders decreased their bets that the euro will decline against the U.S. dollar, figures from the Washington- based Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 123,932 on Aug. 21, compared with net shorts of 137,810 a week earlier.

Investors should sell the lira and buy the Russian ruble because Turkey’s central bank began supporting economic growth and may cut interest rates, according to BNP Paribas SA.

The recent rise in the price of oil may also pressure the lira and support the ruble, BNP said in an e-mailed report today on Central and Eastern Europe, the Middle East and Africa.

“The central bank of Turkey is turning its focus toward slowing growth and is therefore keeping lira liquidity conditions ample, while considering narrowing the overnight rates corridor,” BNP said.

The lira fell 0.2 percent against the dollar and the ruble dropped 0.4 percent.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

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

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