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Euro Reaches 2-Month High Versus Yen as Draghi Sets Bond Buying

The euro rose to the strongest in two months against the yen after the European Central Bank President Mario Draghi announced a bond-purchase plan to cap borrowing costs in the area’s most-indebted nations.

The dollar fell against higher-yielding currencies before a report tomorrow that may show the pace of hiring in the U.S. slowed in August, adding to evidence the Federal Reserve will initiate a third round of bond purchases. The 17-nation euro weakened earlier against the U.S. currency after the ECB forecast a deeper economic contraction this year. Sweden’s krona weakened after the central bank cut interest rates.

“The clarification today is helping to reduce the tail risk that we will have another intensification of the crisis,” said Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York. “That means that we’ve probably seen the worst in the short-term for the euro dollar. That doesn’t mean that it won’t continue to fall over time because we still have a lot more event risk coming up.”

The euro rose 0.8 percent to 99.60 yen at 5 p.m. in New York, after touching 99.81, the strongest since July 5. The shared currency gained 0.2 percent to $1.2631. The yen fell 0.6 percent to 78.86 per dollar.

The Standard & Poor’s 500 Index rose 2 percent.

Risk Sentiment

The dollar fell against currencies linked to risk sentiment amid speculation the jobs report may show slowing labor market strength last month, bolstering the case for the central bank to undertake further monetary easing. A third round of bond purchases, or quantitative easing, by the Fed may debase the dollar.

A gauge of indicators used to measure market expectations for additional U.S. central bank stimulus in August rose to 99 percent, the highest ever, according to Citigroup Inc. The level indicates the market is heavily pricing in another round of stimulus.

Canada’s dollar rose 0.8 percent to 98.27 cents per U.S. dollar, Australia’s dollar rallied 0.9 percent to $1.0284 and South Africa’s rand surged 1.4 percent to 8.3045 per dollar. Benchmark interest rates in those countries are 1 percent, 3.5 percent and 5 percent compared to near zero in the U.S.

The Dollar Index (DXY) fell 0.2 percent to 81.103. The gauge, which tracks the greenback against six major currencies, is weighted 57.6 percent to movements in the euro.

Fed Concern

Fed Chairman Ben S. Bernanke has said the lack of jobs growth is a “grave concern” for U.S. policy makers. The jobless rate has held above 8 percent since February 2009.

U.S. employers added 130,000 jobs last month, down from 163,000 in July, according to a Bloomberg News survey of 91 economists.

“Above 200,000 kills QE in September, without a doubt,” said Greg Anderson, the North American head of G-10 currency strategy at Citigroup Inc. in New York. “Below 100,000 QE odds are higher, but that doesn’t look that good for the economy so that will mean risk-off. A nice sweet spot is between 120,000 to 160,000, which means risk-on scenario.”

The euro has fallen 3.7 percent this year, the worst performer of 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen fell 3.6 percent, and the dollar declined 0.9 percent.

Draghi said the ECB will target government bonds with maturities of one to three years, including longer-dated debt that has a residual maturity of that length. Purchases will be fully sterilized, meaning the overall impact on the money supply will be neutral, and the ECB will not have seniority, he said.

Merk View

ECB action today will provide further support to euro as it removes “tail risk” of currency break-up, Axel Merk, founder and president of Merk Investments LLC in Palo Alto, California, wrote to clients today. The policy actions put the euro on equal footing with other major currencies, he said.

The central bank forecast a deeper economic contraction for 2012 than it did three months ago. Euro-area gross domestic product will drop 0.4 percent this year instead of 0.1 percent, it said.

“The mix of growth downward revision and inflation upward revision is not going to be good for the euro,” said Henrik Gullberg, a currency strategist at Deutsche Bank AG in London. “It’s going to make it tough for the ECB as it constrains their ability to resolve this problem.”

The shared currency will end the year at $1.22, according to the median forecast in a Bloomberg News survey of analysts.

Sweden’s krona dropped against 14 its 16 major counterparts after the central bank unexpectedly lowered its benchmark interest rate for the first time since February.

“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 6.7465 per dollar.

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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