Euro Gains First Time in Week as ECB Buys Bonds; Dollar Falls

The euro strengthened for the first time in a week against the dollar and yen amid speculation European Central Bank buying of Italian and Spanish bonds will stem surging borrowing costs in the region.

Europe’s shared currency rose from yesterday’s five-week low versus the yen amid reports the ECB may start talks to lend to the International Monetary Fund for sovereign bailouts. Italian bonds rose. Norway’s krone rallied against the dollar as the government said it will prop up its export industry with new loans. The Canadian dollar gained after data showed consumer prices rose more than forecast.

“There is a lot of heat, but not a lot of light, because the market is confused what the next step is,” said Boris Schlossberg, director of research at the online currency trader GFT Forex in New York. “For the time being, we’ve stemmed the rise in the credit markets. There seems to be a cold peace right now, but by no means has the war been won; it’s just a pause.”

The euro advanced 0.5 percent to $1.3525 at 5 p.m. in New York in its first gain since Nov. 11. The currency, which gained as much as 1.2 percent today, dropped 1.6 percent this week, its third straight five-day loss. The shared currency rose 0.4 percent to 104 yen, after declining to 103.41 on each of the past two days, the lowest level since Oct. 10. The dollar was little changed at 76.91 yen.

The 17-nation currency pared its advances as U.S. stocks fluctuated and commodities fell.

Giving Back Gains

“The gain we saw in the euro is reflective of hopes for a solution in Europe, as opposed to particularly strong confidence that a solution could be achieved, so you’re seeing it give back some of its gains,” said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York. “I think we will test $1.3429 next week.”

The ECB bought Italian government bonds today, according to five people with knowledge of the trades who declined to be identified because the transactions are private. Three said the central bank also purchased Spanish debt. An ECB spokesman declined to comment.

Italian two-year debt yields decreased 14 basis points, or 0.14 percentage point, to 6.12 percent. They have fallen from a euro-era record of 7.48 percent on Nov. 10. The notes yielded 5.66 percentage points more than comparable German bunds today, after reaching 6.85 percentage points last week, the widest since the euro debuted 1999.

European officials may start talks with the International Monetary Fund on a mechanism for the ECB to lend to the IMF for sovereign bailouts in the region, Dow Jones Newswires reported. Agreement on the proposal may result in an announcement at a European Union summit Dec. 9, the news agency reported, citing two unidentified people with direct knowledge of the matter.

‘Respect of the Traders’

“If this story stays relevant and seems credible, the market will hold because it’s the one story that has hit the tape that seems to have the respect of the traders,” GFT’s Schlossberg said.

ECB President Mario Draghi pushed back against politicians and investors asking him to do more to end the sovereign debt crisis. The central bank would quickly lose credibility if it departed from its primary role of keeping prices stable, Draghi said in a speech in Frankfurt today.

Draghi slammed governments for failing to implement policy commitments. A deal reached lasted month was at least the fourth plan billed as a comprehensive strategy to end the crisis.

Most Since 2008

The cost for European banks to fund in dollars reached a three-year high for a fourth day. Three-month cross currency basis swaps, the rate banks pay to convert euro payments into dollars, fell as much as 132 basis points below the euro interbank offered rate, data compiled by Bloomberg show. It was the most expensive since December 2008.

The euro slid 1.2 percent over the past six months versus nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes, as European leaders struggled to contain the sovereign debt crisis. The yen gained 9.7 percent and the dollar rose 4.3 percent.

The dollar declined against the majority of its 16 most-traded counterparts today after the index of U.S. leading indicators climbed more than forecast in October, encouraging risk appetite. Reports yesterday signaled improvement in the weakest areas of the U.S. economy, with claims for unemployment benefits dropping to the lowest level in seven months and housing starts exceeding forecasts.

Treasuries Drop

Treasuries fell, pushing the yield on the benchmark 10-year note up five basis points to 2.01 percent. The Standard & Poor’s 500 Index ended the day little changed after the Deutsche Presse-Agentur reported Germany’s Foreign Ministry confirmed the nation was considering the possibility of more “orderly defaults” beyond Greece. The S&P GSCI Index of raw materials dropped 0.8 percent.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, fell 0.3 percent to 78.023.

The Canadian dollar appreciated 0.2 percent to C$1.0276 to the greenback in its first gain this week after Statistics Canada said today consumer prices rose 0.2 percent in October, beating the 0.1 percent estimate in a Bloomberg News survey.

Norway’s krone rose against most of its major counterparts after the nation’s government said it will provide exporters as much as 30 billion kroner ($5.2 billion) in new loans to tackle the fallout of Europe’s debt crisis. Norway relies on exports for half its economic output.

The krone gained 0.5 percent to 5.7915 per dollar and was little changed versus the euro to 7.8336.