Euro Gains as ECB Cites Stability, Spanish Auction Yields Fall

The euro reached a one-week high versus the dollar after European Central Bank President Mario Draghi said policy makers have averted a credit shortage and Spain sold almost twice its maximum target at a note auction.

The franc climbed against most of 16 major peers amid bets the Swiss National Bank may moderate its resolve to stem the currency’s gains. Canada’s dollar erased an advance after data showed U.S. retail sales increased less than forecast, while Brazil’s real reached the strongest level in more than a month after that nation’s retail sales beat projections.

“Any good news for the euro zone could be a trigger for traders to cover their short positions,” said Mamoru Arai, foreign-exchange manager at Mizuho Financial Group Inc. in New York. Short positions are bets a currency will fall. “The market focused on the fairly positive comments about the European economy from Draghi, but I think they were well balanced. And there was the good auction from Spain.”

The euro climbed 0.8 percent to $1.2814 at 5 p.m. in New York. It reached $1.2845, the highest since Jan. 5, after falling to $1.2662 yesterday, the lowest since September 2010. The 17-nation currency rose 0.7 percent to 98.36 yen after gaining as much as 0.9 percent earlier. The dollar slipped 0.1 percent to 76.76 yen and touched 76.67 yen, the lowest level since Jan. 5.

Challenge to SNB

Investors are using the uncertainty created by the resignation of Swiss National Bank President Philipp Hildebrand as an opportunity to challenge the bank’s currency floor of 1.20 francs per euro, according to a UBS AG client note.

The SNB imposed the limitation on Sept. 6 to halt the currency’s advance as Europe’s debt crisis fueled demand for the relative safety of Swiss assets, putting pressure on the country’s exporters

The franc traded 0.2 percent higher at 1.2104 per euro and rallied 1 percent to 94.46 centimes per dollar.

Canada’s dollar was little changed at C$1.0191 to the greenback after rallying earlier as much as 0.6 percent. American retail sales rose 0.1 percent last month, data showed, falling short of a 0.3 percent gain forecast in a Bloomberg News survey. The U.S. is Canada’s largest trading partner.

A separate report showed more Americans than forecast filed first-time claims for unemployment benefits last week.

Real Climbs

Brazil’s real advanced 1.3 percent to 1.7796 per dollar after the nation’s retail sales increased 1.3 percent in November from a month earlier. That surpassed the 0.4 percent projection and spurred speculation the central bank can’t cut interest rates by too much without inflation. The real touched 1.7761, its strongest since Dec. 5.

The euro rose 0.6 percent today against nine developed-nation counterparts, according to Bloomberg Correlation-Weighted Currency Indexes. The dollar sank 0.3 percent, and the yen fell 0.2 percent. Switzerland’s franc was the best performer with a gain of 0.8 percent.

Draghi said at a press conference in Frankfurt the record 489 billion euros ($628 billion) in three-year ECB loans to banks last month are beginning to unlock markets and have prevented a “serious” credit contraction.

“Tentative signs” show the euro-area economy is stabilizing even as its sovereign-debt crisis poses risks to the outlook, the ECB president said. Policy makers left their benchmark rate at 1 percent today, in line with the median forecast in a Bloomberg News survey.

‘Better Shape’

“There are signals that the funding market is getting in better shape, which is good for the euro short-term,” said Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York. “The fundamentals, though, have not changed and are still negative.”

The three-month cross-currency basis swap, the rate banks pay to convert euro interest payments into dollars, was 0.8 percentage points below the euro interbank offered rate today, the least expensive since Aug. 31. It was negative 0.9 percentage points yesterday after increasing to negative 1.58 on Nov. 29, the most expensive since 2008.

The pound weakened versus the euro on speculation the Bank of England will increase its bond-buying program this year. The bank’s Monetary Policy Committee held its key interest rate at 0.5 percent, in line with the forecast of all 53 analysts in a Bloomberg survey. Policy makers kept their bond-buying target at 275 billion pounds ($421 billion).

“We expect the Bank of England to expand its quantitative-easing program, possibly next month, to support the economy,” said Ian Stannard, head of European currency strategy at Morgan Stanley in London.

Sterling depreciated 0.8 percent to 83.58 pence per euro. The currency was little changed at $1.5333 after touching $1.5279, the weakest level since Oct. 6.

Spanish, Italian Sales

Spain auctioned 9.98 billion euros ($12.8 billion) of notes today, more than the maximum target of 5 billion euros set for the auction. It issued 4.27 billion euros of new benchmark three-year debt at an average yield of 3.384 percent, down from 5.187 percent at the previous offering on Dec. 1.

Italy sold 12 billion euros of bills at 2.735 percent, down from 5.952 percent at the last auction. The government plans to sell debt tomorrow due in 2014 and 2018.

----With assistance from David Goodman, Anchalee Worrachate and Namitha Jagadeesh in London and Jose Leonel in Sao Paulo. Editors: Greg Storey, Dennis Fitzgerald

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