Euro Rallies on Prospects ECB to Hold; Kiwi Rallies

The euro rose against the dollar and the yen as a gauge showed the region’s services output increased more than initially estimated, boosting speculation the European Central Bank will refrain from cutting interest rates tomorrow.

The dollar fell from almost a seven-week high before data tomorrow that analysts said will show gross-domestic-product growth slowed last quarter and as two Federal Reserve research papers said slack in the economy justified an accommodative stance. The yen slid as Japan’s Topix Index (TPX) of shares rose 0.8 percent, damping demand for the currency as a haven. New Zealand’s currency climbed to a two-week high on jobs gains.

“There’s quite a bit of uncertainties ahead of the ECB meeting,” Brian Daingerfield, a Stamford, Connecticut-based currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit, said in a telephone interview. “There’s some concern about maybe the market might have gone a little bit too far with euro weakness ahead of this meeting.”

The euro strengthened 0.3 percent to $1.3513 at 5 p.m. New York time after declining to $1.3442 on Nov. 4, the weakest level since Sept. 18. The common currency rose 0.4 percent to 133.31 yen. The dollar strengthened 0.2 percent to 98.66 yen.

The Bloomberg U.S. Dollar Index, which tracks the greenback against 10 major currencies, dropped 0.3 percent to 1,013.48 after rising to 1,017 on Nov. 4, the highest since Sept. 18.

Kiwi Gains

New Zealand’s dollar, known as the kiwi, strengthened for a fourth day versus the dollar after Statistics New Zealand said employment in the nation rose 1.2 percent in the third quarter, compared with a 0.4 percent gain in the previous three months.

The kiwi climbed 0.1 percent to 83.77 U.S. cents after advancing to 84.15 cents, the highest level since Oct. 24.

India’s rupee fell the most in two months, and Indonesia’s rupiah fell for a seventh day, the longest losing streak since August, on concern the Fed will pare stimulus earlier than anticipated.

“The rupiah is more exposed to the rising Fed tapering concern because of the weak external balance,” said Saktiandi Supaat, head of foreign-exchange research at Malayan Banking Bhd. (MAY) in Singapore. “The currency is likely to remain volatile until the year-end due to the uncertain global environment.”

The rupee fell 1.3 percent to 62.40 per dollar in Mumbai, biggest drop since Sept. 3. The rupiah declined 0.5 percent from Nov. 4 to 11,410 per dollar in Jakarta, prices from local banks show.

ECB Meeting

The ECB will leave its main refinancing rate at a record low 0.5 percent tomorrow, according to 67 of 70 economists surveyed by Bloomberg News. Bank of America Corp., Royal Bank of Scotland Group Plc and UBS AG predict the ECB will reduce borrowing costs by 25 basis points to a record.

“The euro was lower in recent sessions because of the increased expectation the ECB will cut rates tomorrow -- we don’t think they’re likely to,” Eric Viloria, a senior currency strategist at Gain Capital Group LLC in New York, said in a phone interview. “They’ll probably hint at a rate cut in the future.”

The euro-area index of the services industry was at 51.6 last month, London-based Markit Economics said today, exceeding its initial estimate of 50.9. The gauge has been above 50, indicating expansion, for three months.

The 17-nation currency may rise to a two-year high if it holds a key level of support around $1.3412 to $1.3452, according to MacNeil Curry of Bank of America.

“Euro-dollar is still in an uptrend,” Curry, head of foreign-exchange and interest-rates technical strategy in New York at Bank of America Merrill Lynch, said today in a phone interview. “All we’ve done is sell off very aggressively to previous support. If we take out $1.3835, we have a decent shot at $1.40,” a level last touched in October 2011.

Fed Stimulus

U.S. gross domestic product grew at a 2 percent annualized rate in the third quarter, down from 2.5 percent in the previous three months, according to a Bloomberg survey before the data is released tomorrow. Nonfarm payrolls rose by 120,000 workers last month after a 148,000 gain in September, Labor Department figures may show Nov. 8, based on a separate survey.

The Fed’s policy of seeking to drive down the U.S. unemployment rate is effective, according to two separate papers by top Fed officials posted on the International Monetary Fund’s website.

William English, head of the Division of Monetary Affairs, wrote that the strategy of not raising interest rates if unemployment is above 6.5 percent had provided effective stimulus, and that an even lower threshold could be helpful. A paper by David Wilcox, the research and statistics chief, said that slack in the economy argued for loose policy at a time of contained expectations for inflation.

Options Trading

Volume in over-the-counter foreign-exchange options on the dollar-yen exchange rate amounted to $8.1 billion today, the largest share of currency trades at 22 percent, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg. The total was 2 percent less than the average trading for the pair for the past five Wednesdays at a similar time.

Options on the euro-dollar rate totaled $8 billion, or 22 percent of the total, with trading in the pair 21 percent above average. Total options trading was $37 billion today, from $42 billion yesterday.

The euro strengthened 5.5 percent this year, the best performer of 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar advanced 2.7 percent and the yen slumped 11 percent.

To contact the reporter on this story: Andrea Wong in New York at awong268@bloomberg.net

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

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