Euro Jumps to 2-Year High on Weidmann View; Turkish Lira Slides

The euro reached the strongest level since October 2011 against the dollar after European Central Bank Governing Council member Jens Weidmann said keeping interest rates low may endanger political reforms.

The 17-nation currency advanced versus most of its 16 major counterparts as Weidmann, president of the Germany’s Bundesbank, was cited by Bild newspaper as saying low inflation shouldn’t be used to justify loose monetary policy. The yen dropped to the weakest since October 2008 against the euro as Asian and European stocks advanced, reducing the haven appeal of the Japanese currency. Turkey’s lira slumped to a record amid concern a showdown between the government of Prime Minister Recep Tayyip Erdogan and the judiciary will worsen.

“It was those comments out of Weidmann suggesting too low interest could be a concern for political reform -- I’m surprised something like that would come out of the head of Bundesbank,” Robert Sinche, global strategist at Pierpont Securities Holdings LLC in Stamford, Connecticut, said on Bloomberg Radio’s “Bloomberg Surveillance.” “The move in euro is exaggerated. We actually think euro-dollar is a great sell above $1.38.”

The euro gained 0.4 percent to $1.3749 at 5 p.m. in New York, after rising to $1.3893, the highest level since Oct. 31, 2011. The single currency gained 0.8 percent to 144.59 yen after reaching 145.69, the strongest since October 2008. The dollar rose 0.3 percent to 105.17 yen, reaching the strongest level since Oct. 6, 2008.

Price Swings

JPMorgan Chase & Co.’s volatility index for the currencies of the Group of Seven nations rose to 8.59 percentage points, the highest level since Dec. 13.

Swiss franc’s 1.7 percent gains against the greenback led its 16 major peers in December, while South Africa’s rand lost 3.4 percent, the biggest loser.

The currency of Africa’s largest economy was also the worst performer in 2013, having lost 19.5 percent. Japan’s currency has weakened 17.5 percent, the second worst performance. The euro and Danish krone were the biggest winners, having rallied 4.2 percent.

The yen and Brazil’s real were the worst performers in the fourth quarter, dropping 6.6 percent and 5.2 percent respectively.

Among the 24 emerging-market currencies tracked by Bloomberg, the Bulgarian Lev has gained the most versus the dollar this year at 4.1 percent. The Argentine peso lost the most at 24.3 percent.

Turkey’s Turmoil

The lira tumbled for a third day amid a showdown between the government and judicial powers.

Turkish markets are being roiled by a corruption probe that ensnared Prime Minister Recep Tayyip Erdogan’s cabinet and led to three ministerial resignations and the dismissal of some 500 police chiefs. Istanbul Prosecutor Muammer Akkas wrote in a written statement yesterday that he’d been pulled off an investigation into businessmen and officials for involvement in bribery, rigging tenders and fraud.

“There’s zero predictability,” Cuneyt Paksoy, an investment committee member at Rhea Portfolio Management in Istanbul, said today by phone. “The market is questioning the anchor of political stability, which was the key driver for Turkey’s lift to investment grade.”

Turkey’s currency slumped 1.3 percent to 2.1549 per dollar after dropping to an all-time low 2.1764.

Pound Rally

The pound rose to the strongest in two years against the dollar amid increasing confidence in the economic recovery as economists predict U.K. reports next week will show home prices increased this month and mortgage approvals climbed in November.

“We expect the economic recovery in the U.K. to continue at a solid pace next year, driven by fixed investment and underlying domestic demand,” said Geoffrey Yu, senior currency strategist at UBS AG in London. “That should be supportive for the pound.”

The U.K. currency added 0.4 percent to $1.6483 after advancing to the highest level since August 2011.

The dollar fell against most major currencies amid speculation the Federal Reserve is still a long way from raising interest rates even after starting to reduce asset purchases that have debased the currency.

Fed Policy

“The Fed did decide to taper, but the amount was minimal and we have yet to see what the policy outlook will be going forward,” said Marito Ueda, senior managing director at currency-margin company FX Prime Corp. in Tokyo. “Some bets on dollar gains are being unwound into year-end. The dollar is being sold across the board.”

The Fed said last week it will cut monthly asset purchases in January to $75 billion from $85 billion. Policy makers will reduce bond purchases in $10 billion increments over the next seven meetings before ending the program in December 2014, economists said in a Bloomberg survey published Dec. 19.

The euro strengthened on Weidmann’s comments about prices and monetary policy.

“We must take care to raise interest rates again in a timely manner should inflation pressures build,” Weidmann was quoted by Bild as saying. “The euro area is recovering only gradually from the most severe economic crisis in the postwar period; pricing risks are slight. That justifies low benchmark rates.”

The common currency has appreciated 8.8 percent this year, the best performer of 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar advanced 4 percent, while the yen tumbled 16 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: Robert Burgess at bburgess@bloomberg.net

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