Euro Strengthens on ECB’s Unlimited Bond-Buying Plan

The euro rose against most of its 16 major peers after two central bank officials said European Central Bank President Mario Draghi will announce unlimited sterilized bond buying to quell the region’s debt crisis.

The 17-nation currency climbed to a two-month high against the dollar last week amid optimism Draghi would announce additional monetary stimulus at tomorrow’s ECB meeting. The pound touched a three-month high against the dollar as services growth accelerated, adding to speculation the central bank will refrain from policy stimulus. Canada’s dollar weakened even as the Bank of Canada Governor Mark Carney reiterated that an increase in the central bank’s interest rate may be needed.

“In the very short run, there is potential for the euro to appreciate as the risk premium on European assets decline with the ECB potentially doing a little bit more,” said Aroop Chatterjee, a currency strategist at Barclays Plc in New York. “We expect the ECB to reaffirm the tone from their last meeting, but there are a lot more details that will be needed to be filled in.”

The euro rose 0.3 percent to $1.2601 at 5 p.m. New York time, after falling as much as 0.5 percent. It reached $1.2638 on Aug. 31, the strongest since July 2. The shared currency gained 0.2 percent to 98.77 yen. Japan’s currency was little changed at 78.39 per dollar.

The shared currency gained as much as 0.3 percent versus the Swiss franc, its largest intraday move in a month. It traded at 1.20400 per euro.

Chart Patterns

“Technically, the euro is in a really nice downtrend and a convincing break above $1.2650 could reverse this downtrend,” said Eric Viloria, senior currency strategist for Gain Capital Group LLC in New York. “Draghi talked about bond buying at the last meeting, so there has been a lot of optimism priced in and the euro has already moved higher. It could be buy-the-rumor, sell-the-fact.”

The euro may decline to a two-year low after it reaches the upper range of its so-called downward channel, Forecast Pte said.

Option traders have cut bearish bets on the euro to the lowest since February 2009 as the ratio of outstanding puts to sell shares of the Euro Currency Trust versus calls to buy the securities fell to a more than three-year low of 1.38-to-1 on Aug. 31, according to data compiled by Bloomberg.

Canada’s dollar fell 0.5 percent to 99.05 cents per U.S. dollar after the central bank maintained benchmark interest rates at 1 percent. Carney said an interest rate increase may be needed as domestic spending props up an economic recovery restrained by weak global demand for exports.

Market Test

The loonie, as the currency is nicknamed, may test a four- month high versus its U.S. peer that it has failed to breach three times during the past two weeks, according to Toronto- Dominion Bank, citing technical indicators.

It touched 98.43 cents per U.S. dollar yesterday, which represents the top of the currency’s recent range versus the greenback, after previously reaching that level on Aug. 21 and 28, Bloomberg data show. That’s the strongest since it reached 98.29 on May 3.

The Australian dollar is the strongest net-sold currency today, according to Bank of New York Mellon client flows. The pace of selling is double the average during the past year, Samarjit Shankar, a managing director for the foreign-exchange group wrote to clients today. The euro is net-bought today after seven consecutive sessions of outflows he said.

The so-called Aussie weakened 0.3 percent to $1.0193 after dropping to $1.0167, the lowest level since July 13. The currency slid 0.4 percent to 79.91 yen as growth in the south Pacific nation slowed more than economists forecast in the second quarter.

Pound Up

The pound rose on signs the U.K. recession is easing. It gained 0.2 percent to $1.5902, after reaching $1.5934, the strongest level since May 16. The U.K. currency was 0.1 percent weaker at 79.23 pence per euro.

The Dollar Index (DXY), which IntercontinentalExchange Inc. uses to track the greenback against those of six U.S. trading partners, fell 0.1 percent to 81.312.

Under the ECB blueprint, which may be called “Monetary Outright Transactions,” the ECB would refrain from setting a public cap on yields, according to the central bankers, and a third official, who spoke on condition of anonymity. The plan will only focus on government bonds rather than a broader range of assets and will target short-dated maturities of up to about three years, two of the people said.

German Chancellor Angela Merkel told lawmakers she can accept temporary ECB bond buying, according to a member of her party. German legislator Norbert Barthle said in Berlin that Merkel spoke in a closed-door meeting of Christian Democratic Union lawmakers.

German Ruling

Germany’s Constitutional Court is set to rule on the legality of the European Stability Mechanism, the euro region’s permanent bailout fund, on Sept. 12. The ECB may delay giving full details of Draghi’s bond-buying plan until after the ruling, two central bank officials said on Aug. 24.

“The move looks like a sugar high as we’ve been anticipating Draghi’s plan, but it heightens curiosity going into the press conference tomorrow,” said Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York. “There’s still a lot to be done with the German constitutional vote coming up.”

The euro has dropped 3.2 percent in the past six months, the worst performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen gained 4.8 percent, and the dollar appreciated 1.2 percent.

The euro will fall to $1.22 by year-end, according to the median forecast of Bloomberg survey of 53 analysts. The common currency will be little changed at 98 yen, the forecasts show.

To contact the reporter on this story: Allison Bennett in New York at abennett23@bloomberg.net

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

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