Euro Gains Most in 10 Months as Prices Trim ECB Bets; Yuan Falls

The euro had its biggest monthly gain since April as higher-than-projected inflation spurred speculation the European Central Bank will refrain from additional monetary stimulus at a meeting next week.

The dollar had its worst month since September even after Federal Reserve Chair Janet Yellen reiterated in Senate testimony that the central bank is likely to maintain its strategy of gradually trimming bond purchases. China’s yuan decreased versus all except two of its emerging-market peers in February as the People’s Bank of China considers doubling the size of the currency’s trading band versus the dollar. The ECB meets March 6 in Frankfurt.

“The inflation numbers were better than expected, and some of the expectations for a rate cut next week have been tempered,” Brian Daingerfield, a Stamford, Connecticut-based currency strategist at Royal Bank of Scotland Group Plc, said yesterday in a phone interview. “Going into this week, there was building anticipation for an ECB rate cut.”

The 18-nation euro appreciated 2.3 percent last month to $1.3802 in New York, after touching $1.3825, its strongest level since Dec. 27. Europe’s shared currency gained 2.1 percent to 140.49 yen. The dollar fell 0.2 percent to 101.80.

Price Swings

JPMorgan Chase & Co.’s Global FX Volatility Index fell to 7.64 percent on Feb. 25, the lowest close since Oct. 28 and down from a 2014 high of 8.98 percent on Feb. 3.

Currencies for commodity-linked nations were among the biggest major currency gainers in February. The Norwegian krone rose the most, increasing 4.6 percent versus the dollar, followed by the New Zealand dollar’s 3.8 percent advance.

A custom Bloomberg index with equal weightings of seven commodity currencies climbed 1.1 percent from last month’s 2.9 percent slide, which was the most since 2011. The gauge’s February gain was the biggest since December 2012.

Twenty seven of the 31 major currencies gained versus the dollar this month, led by Indonesian rupiah’s 5.2 percent, according to data compiled by Bloomberg. Russia’s ruble lost 2 percent, followed by Colombian peso’s 1.5 percent.

The yen has gained 3.4 percent this year, according to Bloomberg Correlation-Weighted Indexes that track 10 developed-nation currencies. The euro was little changed, while the dollar lost 0.4 percent.

Futures Positions

Hedge funds and other large speculators increased their bets that the euro will rise against the dollar, figures from the Washington-based Commodity Futures Trading Commission show. The difference in the number of wagers on a gain in the euro compared with those on a decline, known as net longs, was 13,900 on Feb. 25, compared with 8,599 a week earlier.

The euro rose to its 2014 high versus the dollar yesterday as consumer prices in the region grew an annual 0.8 percent, the same pace as in the previous two months, according to the European Union’s statistics office in Luxembourg. That exceeded the median estimate of 0.7 percent in a Bloomberg news survey of 41 economists.

“The market tends to expect weak CPI data, now it has less of a reason to do what they’ve done in the past with a short position going into the ECB meeting,” Shahab Jalinoos, a senior currency strategist for UBS AG in Stamford, Connecticut, said yesterday in a phone interview. “Europe just doesn’t look that bad on a relative basis. When you put it altogether, there’s a less negative inflation outlook.” A short position is a bet an asset will decline in value.

Jobs Data

The unemployment rate, which ECB President Mario Draghi has cited as contributing to low inflation, held at 12 percent in January, just off the euro-era record of 12.1 percent last seen in September, Eurostat said yesterday in a separate report.

The People’s Bank of China is expected to double the yuan’s trading band by the end of June, according to the 24 of 29 analysts surveyed by Bloomberg, as policy makers loosen exchange-rate controls and promote greater use of the currency in global trade and finance.

The Chinese central bank wants to “have some two-way risk embedded in the market before they take that step,” Jens Nordvig, the New York-based managing director of currency research at Nomura Holdings Inc., said in an interview on Bloomberg Radio’s “Surveillance” with Tom Keene and Michael McKee. “They’re getting ready for a band-widening. It could happen in the next few weeks.”

China’s currency depreciated 1.4 percent to 6.1450 per dollar in February, according to China Foreign Exchange Trade System prices. The yuan fell as much as 0.9 percent to 6.1808 yesterday.

Weather Report

The dollar weakened as investors and Fed policy makers seek to determine is harsh U.S. winter weather has crimped or masked underlying strength in the economy. Durable goods orders to U.S. factories fell 1 percent in January, the Commerce Department reported Feb. 27, while new-home sales unexpectedly rose 9.6 percent to a five-year high, a separate department report showed.

U.S. payrolls expanded by 150,000 last month and nation’s jobless rate remained at 6.6 percent, the lowest level since October 2008, according to the median estimates in separate Bloomberg News surveys of economists before the Labor Department’s March 7 report.

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major currencies, dropped 1.4 percent in February, the biggest monthly slide since September. The index is down 0.3 percent this year after rising 3.1 percent last year.

“Weaker data in the U.S., combined with a more positive risk environment, has resulted in some dollar weakness,” RBS’s Daingerfield said.

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net

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

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.