Euro Gains After Manufacturing Gauge Rises; Sterling Slumps

Euro Gains After Manufacturing Gauge Rises
The euro rose against all 16 of its major peers. Photographer: Chris Ratcliffe/Bloomberg

The euro rose for a second day against the dollar after a gauge of regional manufacturing unexpectedly increased, indicating the currency’s appreciation may fail to check Europe’s economic growth.

The euro climbed against 13 of its 16 major peers. The U.K. pound slid to a six-month low versus the common currency on bets the Bank of England will boost the economy by printing cash as Prime Minister David Cameron’s government reduces the deficit. Deutsche Bank AG cut its forecasts for the dollar against the euro, saying the greenback’s outlook is “clearly negative.”

“Germany is still competitive at current euro-dollar rates,” said Peter Frank, a currency strategist at Societe Generale SA in London. “It cements in the market psyche the fact that the euro is not overvalued at $1.40.”

The euro strengthened 0.4 percent to $1.4018 at 8:34 a.m. in New York, from $1.3964 yesterday. It advanced 0.4 percent to 113.70 yen, from 113.23. The pound slid as much as 1.1 percent to 89.08 pence per euro, the weakest level since March 31.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners including the euro, yen, pound and Canadian dollar, fell 0.3 percent to 76.939.

Asian currencies rose after China’s third-quarter economic growth beat analysts’ estimates, helping to ease concern that an unexpected interest-rate increase will slow the world’s second-largest economy.

G-20 Meeting

U.S. Treasury Secretary Timothy F. Geithner will meet his counterparts from the Group of 20 nations in Gyeongju, South Korea, over the next few days with foreign-exchange policies likely to be on the agenda. The policy makers are planning to say members will refrain from “competitive undervaluation” of their currencies, an official from a G-20 nation said today, citing a draft statement and speaking on condition of anonymity.

The Wall Street Journal cited Geithner as saying major currencies are “in alignment” and he’ll work to persuade leaders that the U.S. isn’t trying to weaken the dollar.

Europe’s Markit Economics manufacturing gauge rose to 54.1 in October from 53.7 the previous month, exceeding analysts’ estimate for a drop to 53.2. There was “an increase in the rate of growth of manufacturing new orders, driven largely by better export sales,” Markit said today in a statement on its website. The organization’s composite index of services and manufacturing industries fell to 53.4 from 54.1 in September.

German Notes

German two-year government notes fell for a seventh straight day, widening the securities’ yield premium to U.K. and U.S. debt, as traders added to bets the European Central Bank will be first to withdraw extraordinary stimulus measures.

The U.K. two-year note yield fell to a record 0.557 percent, widening the difference in yield with German securities three basis points to 38 basis points, the most since November. The U.S.-German difference increased to 63 basis points.

“You’re getting a pretty big swing in interest-rate differentials that is giving a push lower for sterling,” said Ray Farris, the London-based head of foreign-exchange strategy at Credit Suisse Group AG.

Speculation that the Bank of England will add to asset purchases pushed the pound lower against all of its major peers. Minutes of the last policy-maker meeting showed yesterday that the central bank may be moving toward bond purchases to shore up the recovery. Government data today showed U.K. retail sales unexpectedly dropped in September for a second month.

Osborne Plan

Chancellor of the Exchequer George Osborne yesterday detailed his plan to almost eliminate the nation’s record 156 billion-pound budget deficit.

“The spending review has added to the feeling that monetary policy needs to do more work,” said Daragh Maher, deputy head of global foreign-exchange strategy at Credit Agricole SA in London. “It seems the foreign-exchange market is more inclined to think quantitative easing is a done deal. The data in the euro zone has tended to surprise to the upside. It means the euro is going to be the winner.”

Investors should sell the pound as the U.K.’s budget cuts will likely prompt the Bank of England to step up bond purchases, according to UBS AG.

“The risk of renewed quantitative easing makes sterling a sell,” Mansoor Mohi-uddin, head of global currency strategy at UBS in Singapore, wrote to clients today. “As Britain continues to run a large trade imbalance, monetary policy may have to be loosened again sharply to support the economy.”

Sterling fell 0.5 percent to $1.5767.

Deutsche Bank raised its estimate for the euro to $1.45 for both the end of the year and the end of the first quarter next year, up from $1.30 and $1.35 respectively, Bilal Hafeez, global head of foreign-exchange strategy in London, said today in a research note. His prediction for the end of next year is $1.30, according to the note.

Deutsche Bank forecasts the yen will strengthen to 75 against the dollar over the same period, according to the report.

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