Dollar, Yen Fall as Higher-Risk Assets Gain on Europe Optimism

The dollar and yen weakened versus most major counterparts as bets that European leaders are closer to stemming the region’s debt crisis increased appetite for higher-risk assets.

The euro pared its advance as the cost of funding in U.S. dollars increased to almost a three-year high. The currency climbed earlier by the most in two weeks versus the greenback after German Finance Minister Wolfgang Schaeuble urged fast-track treaty changes to tighten budget discipline. New Zealand’s dollar strengthened after Prime Minister John Key was re-elected with his party’s biggest majority in 60 years.

“We’re seeing more urgency on behalf of the European leaders to address the crisis, and that’s probably what’s encouraging the market,” said Vassili Serebriakov, a currency strategist in New York at Wells Fargo & Co. “The bottom line is that this is not a turnaround of any sort. It looks just like a short-covering rally that is maybe already running out of steam.” A short position is a bet a currency will weaken.

The dollar weakened 0.6 percent to $1.3320 per euro at 5 p.m. New York time, after appreciating to $1.3212 on Nov. 25, the strongest level since Oct. 4. It lost as much as 1.2 percent today, the biggest intraday decrease since Nov. 11. The yen depreciated 0.9 percent to 103.88 per euro, after sliding 1.6 percent earlier, the biggest intraday decline since Oct. 31. The greenback gained 0.3 percent to 77.98 yen.

The Standard & Poor’s 500 Index climbed for the first time in eight days, rising 2.9 percent on optimism for Europe and after U.S. Thanksgiving retail sales jumped 16 percent to a record, easing concern the economy will slip into a recession.

Real Gains

Brazil’s real was the biggest winner among the U.S. dollar’s 16 most-traded counterparts, appreciating 2 percent to 1.8548 per dollar. The Australian dollar gained 2 percent to 99.05 U.S. cents, and South Africa’s rand rose 1.8 percent to 8.3881 to the greenback.

President Barack Obama said today resolving the European debt crisis is of “huge importance” to the U.S. and his administration is “ready to do our part” in stabilizing the global economy. He spoke at the White House after meeting with European Council President Herman Van Rompuy and European Commission President José Manuel Barroso.

A treaty change is necessary to give veto power over member-state budgets to the European Union Commission, Germany’s Schaeuble said in an interview with ARD television in Berlin yesterday.

‘Important Signal’

“We can do that quickly, and this will send an important signal to markets that the euro is and remains a stable currency,” Schaeuble said.

Euro-area finance ministers meet tomorrow in Brussels as governments try to regain financial markets’ confidence. German Chancellor Angela Merkel will deliver a speech on the crisis to the lower house of parliament in Berlin on Dec. 2, previewing a Dec. 9 summit of European leaders that is due to discuss proposals for treaty change, according to Merkel’s chief spokesman, Steffen Seibert.

Germany is working with “an ambitious timeline because we believe that Europe can’t wait for this forever, but that it should also be possible to put such limited change into effect in what for some is a surprisingly short time,” Seibert told reporters in Berlin today.

Merkel and French President Nicolas Sarkozy may start a coalition of euro-region members that would commit to greater fiscal discipline without waiting to change EU treaties, Germany’s Welt am Sonntag newspaper reported, without saying where it got the information.

Basis Swap

The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, was 1.49 percentage points below the euro interbank offered rate. It reached 1.61 percentage points Nov. 25, the most expensive level on an intraday basis since October 2008, before paring the increase to 1.46 percentage points. The average level this year is 0.53 percentage points.

“The market was incredibly bearish on the euro, so it was always ripe for a short squeeze, and that’s what we’re getting,” said Richard Franulovich, a senior currency strategist in New York at Westpac Banking Corp. “I’m skeptical that this is a fundamental turning point, but I do think it could last into next week.”

The dollar advanced 6.7 percent over the past month in the best performance against nine developed-market peers measured by Bloomberg Correlation-Weighted Currency Indexes. The yen rose 1.7 percent, and the euro gained 0.2 percent.

IMF: No Request

Europe’s shared currency remained higher versus the greenback even after International Monetary Fund Managing Director Christine Lagarde said the Washington-based institution hasn’t received any request for loans from Italy. She spoke today to reporters in Lima, Peru.

The Italian newspaper La Stampa reported earlier that the IMF was preparing a 600 billion euro ($799 billion) loan for Italy in case the debt crisis worsens. It didn’t say where it got the information.

The IMF had about $390 billion available for lending as of Nov. 17, which Lagarde has said may not suffice to meet loan demand if the global outlook worsens.

The shared currency has fallen 3.9 percent against the dollar this month, after gaining 3.5 percent in October, amid signs European growth is losing momentum. The euro has declined 0.5 percent this year versus the greenback.

New Zealand’s dollar, nicknamed the kiwi, rose versus the majority of its 16 most-traded peers after Key was re-elected with a larger majority, boosting his ability to balance the budget. The kiwi advanced 2 percent to 75.51 U.S. cents and climbed 2.5 percent to 58.886 yen.

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