The euro rose for a second day against the dollar and the yen after European policy makers announced a loan plan of almost $1 trillion to aid debt-laden governments and shore up the 16-nation currency.
The common currency pared what had been the biggest two-day advance since March 2009 amid concern that the aid package may not end Europe’s fiscal debt crisis. ECB President Jean-Claude Trichet said the move wasn’t supported by all 22 of its Governing Council members. The yen dropped against every currency tracked by Bloomberg except the Costa Rican colon as the aid plan revived demand for assets tied to economic growth.
“Europe has crossed the Rubicon in a big way,” said Eric Fine, who manages Van Eck Associates Corp.’s G-175 Strategies emerging-market hedge fund. “This will buy them time but it reduces the incentive for indebted nations to perform. The market so far has done a good job of decoupling from Europe.”
The euro rose 0.2 percent to $1.2775 at 4:49 p.m. in New York, from $1.2755 on May 7. It earlier gained as much as 2.7 percent to $1.3094. The 16-nation currency surged as much as 4.7 percent to 122.29 yen, the biggest intraday advance since Nov. 13, 2008, before trading at 119.12, compared with 116.81. The dollar increased 1.7 percent to 93.22 yen, from 91.59.
Since May 6 the euro rose as much as 3.8 percent, the biggest two-day gain since March 19, 2009, before paring its advance.
Three-month implied volatility for the seven biggest developed-country currencies fell 9.1 percent to 13.56 percent today after trading at an 11-month high of 15.2 percent on May 6, according to the JPMorgan Chase & Co. G-7 Volatility Index.
The euro is “endangered,” John Taylor, who helps oversee $7.5 billion as chairman of New York-based FX Concepts Inc., manager of the world’s largest currency hedge fund, said in a Bloomberg Television interview. “The political solution that involves tying the states together of Europe like the states are in the United States, is a very difficult to do. And it’s clear now that everyone is focusing on this and Europe can’t do it.”
The euro has lost 7.5 percent this year, based on Bloomberg Correlation-Weighted Indices, and has fallen 0.5 percent today. The dollar has gained 5 percent this year, while the yen has risen 4.7 percent.
“Markets have staged a clear relief rally on the weekend EU/IMF plan,” Win Thin, a senior currency strategist at Brown Brothers Harriman & Co. in New York, wrote in a note to clients. “However, spreads on bonds from the peripheral euro zone countries have not yet returned to normal, and suggests that investors still have serious doubts about Greece and the other weak euro zone credits.”
The extra yield investors demand for holding the debt instead of benchmark German bunds fell to 379 basis points, from 965 basis points last week, the least since the close on March 29. The 10-year average is 64 basis points.
Europe’s currency tumbled 4.1 percent last week in its biggest slide since October 2008. It touched $1.2529 on May 6, its lowest level since March 5, 2009.
Under pressure from the U.S. and Asia to stabilize markets, the European governments gambled that a show of financial force would ease a sovereign-debt crisis and combat speculation the 11-year-old euro may break apart.
Governments of the 16-euro nations agreed today to lend as much as 750 billion euros ($958 billion) to the most-indebted countries. The European Central Bank said it will counter “severe tensions” in “certain” markets by purchasing government and private debt.
The European Central Bank said in a statement it will intervene in government and private bond markets “to ensure depth and liquidity in those market segments which are dysfunctional,” and central banks in Germany, Italy and France began buying government bonds today. The ECB restarted a dollar- swap line with the Federal Reserve.
By resorting to what some economists have called the “nuclear option,” the ECB may open itself to the charge it’s undermining its independence by helping governments plug budget holes.
The ECB’s Trichet said the bank wasn’t pressured by politicians into the decision and he indicated the move wasn’t supported by all 22 of its Governing Council members.
Investors should use a rally in the euro to make fresh bets on the currency’s decrease toward $1.20 within three months, according to Barclays Plc. UBS AG and Bank of Tokyo also said the euro will stay weaker because of the ECB’s policy of easing.
South Africa’s rand rose 4.7 percent to 12.4750 yen and Australia’s dollar advanced 3.6 percent to 84.22 yen as the European aid plan increased demand for carry trades, in which investors buy higher-yielding assets with amounts borrowed in nations with low interest rates. Japan’s benchmark of 0.1 percent makes the yen a popular funding currency for such trades.
Official action that supported the euro is “even more positive for the general risk proxies in foreign-exchange markets,” said Adam Cole, head of global currency strategy at Royal Bank of Canada in London. “It’s playing out primarily through an unwinding of the risk aversion move we’ve seen. It’s positive for the euro, but even more positive for currencies like the Aussie.”
The yen fell against almost all its counterparts today except for the Costa Rican colon, which fell 0.5 percent. The second-worst performer, the Algerian dinar, rose 1 percent.
The pound pared its gains versus the dollar after Prime Minister Gordon Brown said he’s willing to resign as prime minister and leader of Britain’s Labour Party to allow negotiations to go ahead with the opposition Liberal Democrats on forming a government.
Sterling traded at $1.4865 after earlier rising as much as 1.7 percent to $1.5054 amid speculation Conservative leader David Cameron may ally with the Liberal Democrats to create a coalition government strong enough to tackle the nation’s record budget deficit.