Euro Trades Near Two-Month High on ECB Bond-Buying Plan

The euro strengthened to a two-month high against the dollar on speculation the European Central Bank will today announce unlimited, sterilized bond buying to help contain the region’s debt crisis.

The 17-nation currency extended this week’s advance versus the yen after the ECB left its benchmark interest rate at 0.75 percent at a policy meeting today. The dollar rose against the yen after an industry report showed U.S. companies added more jobs than economists forecast. Sweden’s krona weakened after the central bank cut interest rates to help exporters.

“It is one of the most important days this year, a potential game changer for the European debt crisis,” said Bernd Berg, a currency strategist at Credit Suisse Group AG in Zurich. “The euro is trading higher into the meeting as expectations are high but there is a risk of a downward move after the statements.”

The euro strengthened 0.3 percent to $1.2632 at 1:25 p.m. London time after rising to $1.2652, the strongest since July 2. The shared currency gained 0.7 percent to 98.50 yen. It earlier climbed to 99.58, the highest since July 5. The dollar rose 0.5 percent to 78.77 yen.

Policy makers meeting in Frankfurt left the benchmark rate at a record low, as predicted by 28 of 58 economists in a Bloomberg survey. The remainder forecast a quarter-point cut. Investors are focused on Draghi’s press conference at 2:30 p.m., when he may announce details of a plan to intervene in bond markets to help restore transmission of ECB interest rates.

ECB Blueprint

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

The government-bond purchases will be matched by the ECB’s removal of an equivalent amount of money from elsewhere in the system to ease concerns about printing money, two central bank officials briefed on the plan said.

The euro may strengthen to $1.275 if Draghi’s plan “positively surprises” investors, or weaken to $1.25 if he disappoints, Credit Suisse’s Berg said.

German Chancellor Angela Merkel told lawmakers yesterday 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.

‘Conditionality’ Key

“There’s a lot in the mix today but it is really the conditionality that the market will be looking for” from the ECB, David Bloom, head of currency strategy at HSBC Holdings Plc in London, said on Bloomberg Television’s “Countdown” with Linzie Janis. “If the market goes risk on and people think the break up premium in the euro disappears, it could easily go back up to $1.30” in coming weeks, he said.

The euro has gained 0.9 percent in the past week, the best performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen fell 0.4 percent, and the dollar declined 0.2 percent.

The dollar rose the most in three weeks against the yen after ADP Employer Services said U.S. companies added 201,000 workers in August from a revised 173,000 the previous month.

The median estimate in a Bloomberg survey was for an increase of 140,000. U.S. employers added 127,000 workers last month, down from 163,000 in July, according to a separate Bloomberg survey before the Labor Department report tomorrow.

Krona Falls

Sweden’s krona dropped against all except two its 16 major counterparts after the central bank unexpectedly lowered its benchmark interest rate for the first time since February.

Policy makers cut the repo rate by a quarter point to 1.25 percent. The move was predicted by six of the 22 economists in a Bloomberg News survey, while the others forecast no change.

“During the summer the krona has appreciated faster than expected and productivity has also been unexpectedly high,” the Riksbank said. “Inflationary pressures are therefore expected to be lower than was forecast in July.”

The krona fell 0.3 percent to 8.5027 per euro after sliding as much as 0.8 percent.

The pound was little changed against the dollar after the Bank of England left its benchmark interest rate at a record-low 0.5 percent and kept its asset-purchase target at 375 billion pounds ($597 billion.)

The Bank of England cut its economic forecasts last month, while the Organization for Economic Cooperation and Development lowered its outlook today.

Sterling traded at $1.5919, and depreciated 0.2 percent to 79.35 pence per euro.

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net; Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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