Euro Declines as Volatility Low Boosts Carry Trade; Krona Slides

The euro fell for a second day versus the dollar as a report showed investor confidence declined and as record-low foreign-exchange volatility boosted demand for higher-yielding assets.

The 18-nation common currency dropped against most of its 16 major counterparts. The yen fell to almost its weakest level in a month versus the greenback as the nation reported a current-account surplus in April that was smaller than forecast. Sweden’s krona slipped amid bets the Riksbank will come under pressure to cut interest rates. Brazil’s real rallied the most in emerging markets.

“The euro right now is becoming the favorite funding currency of the carry trade,” Sireen Harajli, a strategist at Mizuho Bank Ltd. in New York, said by phone today. “We’re seeing a lot of pressure on the euro as a result of that.”

The euro slipped 0.4 percent to $1.3594 as of 5 p.m. New York time, after dropping to $1.3503 on June 5, the lowest since Feb. 6. The shared currency weakened 0.3 percent to 139.37 yen. Japan’s currency dropped 0.1 percent to 102.53 per dollar.

Price Swings

JPMorgan Chase & Co.’s Global FX Volatility Index fell to 5.8 percent, down from as much as 27 percent in October 2008, after Lehman Brothers Holdings Inc.’s collapse froze credit markets amid the worst financial crisis since the Great Depression. Lower volatility increases the appeal of a strategy of borrowing in currencies with low interest rates and investing in a higher-yielding currency, known as the carry trade.

Brazil’s currency climbed as the central bank extended its intervention program to support the exchange rate. The real rose 0.8 percent to 2.2293 per U.S. dollar, the biggest increase among 24 developing-nation currencies tracked by Bloomberg.

Yuan forwards jumped the most since January 2012 after China’s trade surplus almost doubled and the central bank boosted the currency’s daily reference rate. The People’s Bank of China raised its yuan fixing by 0.22 percent, limiting the scope for declines in Asia’s worst-performing currency of 2014. The spot rate gained 0.16 percent to 6.2404.

The ruble headed for a two-week high on optimism U.S. and European monetary policy will boost the appeal of Russian assets as prospects for peace in Ukraine improved.

Ruble Rise

The currency gained for a fourth day, appreciating 0.4 percent to 39.8907 against the central bank’s target basket of dollars and euros, the highest since May 26 on a closing basis.

An index measuring sentiment in the euro area declined to 8.5 in June from 12.8 in May, Sentix research institute said today. Economists had predicted an increase to 13.3, according to a Bloomberg News survey.

The Eonia index, a gauge of the cost for banks to borrow from each other overnight in euros, fell to 5.3 basis points, or 0.053 percentage point, the lowest since May 17, 2013.

“Euro slippage today is the result of speculation the euro will become a funding currency,” said Eimear Daly, head of market analysis at Monex Europe Ltd. in London. Longer-term, “with so much capital inflow and no offsetting monetary easing, the outlook for the euro remains higher,” she said.

The euro slipped to a four-month low last week as the ECB on June 5 became the first major central bank to charge fees on deposits and unveiled other plans to support an economy threatened by deflation. Policy makers led by President Mario Draghi cut the deposit rate to minus 0.1 percent, lowered the main refinancing rate to a record 0.15 percent and announced measures including targeted long-term loans.

Yen Declines

The yen slipped as the nation recorded a current-account surplus of 187.4 billion yen in April, compared with estimates for a 287.7 billion yen surplus.

“Japan’s trade position has deteriorated markedly in recent years and that’s something we continue to see as a negative factor for the yen,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “This low-volatility environment is encouraging investors to rebuild carry trades so that is a potential negative for the yen.”

Bank of Japan Governor Haruhiko Kuroda holds a press conference after the central bank’s rate decision on June 13.

The yen tumbled 4.7 percent in the past year, the worst performer after the Canadian dollar among 10 developed-nation currencies tracked by Bloomberg Correlation Weighted Indexes. The euro gained 2.1 percent, while the U.S. dollar declined 0.7 percent.

Sweden’s krona declined against all its 16 major peers, sliding 0.5 percent to 9.0859 versus the euro. It depreciated 0.8 percent to 6.6838 per dollar.

“A softer ECB last week adds pressure on the Riksbank to cut rates in July, which might add to bets for a weaker krona,” said Karl Steiner, a foreign-exchange strategist at SEB AB in Stockholm. “The krona strengthened to make it overvalued against the euro on Friday when Swedish fixed-income markets were closed” for a holiday, he said.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Paul Cox, Kenneth Pringle

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