Euro Declines to Six-Week Low as Economy Shrinks; Pound Rises

The euro fell to a six-week low against the dollar after reports showed the region’s economy shrank more last quarter than analysts forecast and German growth cooled.

The Dollar Index (DXY) climbed to the highest level since July as improving sentiment toward the U.S. economy spurred bets the Federal Reserve will reduce stimulus measures. The pound strengthened versus all except two of its 16 major counterparts after the Bank of England upgraded its estimate of the U.K. economy. Switzerland’s franc fell to the lowest level in almost nine months against the dollar.

“It’s clear that it’s weaker macroeconomic fundamentals and growth divergence which are driving the euro lower at present,” said Stephen Gallo, European head of currency strategy at Bank of Montreal in London. “Financial stability risks have been supplanted by macroeconomic ones. We look for very measured declines between here and $1.27.”

The euro fell 0.5 percent to $1.2861 at 7:13 a.m. New York time after declining to $1.2852, the weakest since April 4. The shared currency dropped 0.2 percent to 132.11 yen. The dollar gained 0.3 percent to 102.72 yen after advancing to 102.76 yen, the strongest level since October 2008.

Gross domestic product in the euro zone fell 0.2 percent last quarter, the European Union’s statistics office said. The median estimate in a Bloomberg News survey was for a 0.1 percent contraction. The German economy grew 0.1 percent, below the 0.3 percent expansion forecast by economists.

‘Growth Differentials’

“The event-risk calendar over the next week looks skewed in favor of renewed” weakness in the euro, Richard Franulovich, a senior currency strategist at Westpac Banking Corp. (WBC) in New York, wrote in a note to clients. The dollar’s advance is “perfectly consistent with an unmistakable shift in growth differentials,” he said.

Westpac recommends selling the euro against the dollar, targeting $1.2850 into next week.

The euro has still gained 3.6 percent in the past six months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar appreciated 2.9 percent, while the yen tumbled 21 percent.

The Dollar Index advanced for a fifth day as economists surveyed by Bloomberg predict U.S. data today will show manufacturing in the New York area expanded in May, while U.S. industrial production declined.

The Fed Bank of New York will say its general economic index improved to 4 this month from 3.05 in April, according to a Bloomberg survey before the report at 8:30 a.m. New York time.

Outpacing Europe

The U.S. economy will expand 2 percent this year, compared with a 0.5 percent contraction in the euro area and growth of 1.4 percent in Japan, according to median analyst estimates compiled by Bloomberg. The Fed is buying $85 billion of Treasury and mortgage debt each month to spur growth.

Fed Bank of Richmond President Jeffrey Lacker will speak today in Baltimore after his counterpart in Philadelphia Charles Plosser this week reiterated that the central bank should begin to curtail bond purchases.

“Yield differentials have turned a little more in favor of the U.S. and that’s helped the dollar across the board,” said Michael Turner, a debt strategist at Royal Bank of Canada in Sydney. “The economic trend is improving over the medium term, so it’s really down to what the Fed has to say.”

The Dollar Index, which Intercontinental Exchange Inc. uses to track the currency against those of six major U.S. trade partners, gained 0.5 percent to 83.975 after rising to 84.034, the highest since July 25.

Pound Gains

The pound rose for the first time in four days against the euro as the Bank of England upgraded its estimate of the U.K. economy in its quarterly Inflation Report.

The central bank forecast the expansion may accelerate to 0.5 percent this quarter from 0.3 percent in the first three months of the year.

“The pound is reacting to the headlines on slightly higher growth and lower inflation forecasts from the Bank of England,” said Gavin Friend, a currency strategist at National Australia Bank Ltd. in London. “It fits with the run of U.K. data we’ve had recently. There’s a sense that some of the worst is over, but the economy is still flatlining.”

The pound advanced 0.5 percent to 84.55 pence per euro after depreciating to 85.17 pence yesterday, the weakest since April 25. Sterling was little changed at $1.5217 after declining to $1.5193, the lowest level since April 4.

The franc fell for a fifth day against the dollar, dropping 0.6 percent to 97.28 centimes after depreciating to 97.38, the weakest since Aug. 20. The Swiss currency was little changed at 1.2507 per euro.

South Korea’s won fell on speculation policy makers will take steps to weaken the currency to help exporters compete with those in Japan. The currency declined 0.8 percent to close at 1,114.76 per dollar in Seoul.

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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