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Euro Rises Against Dollar, Yen Before ECB Bank-Loan Operation

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Feb. 28 (Bloomberg) -- The euro strengthened against the dollar and yen on speculation a European Central Bank allotment of three-year loans to banks tomorrow will bolster investor appetite for the region’s assets.

The 17-nation currency earlier pared its gain against the greenback after Irish Prime Minister Enda Kenny said the nation will hold a referendum to ratify the European fiscal compact, raising concern about the measure’s implementation. Higher-yielding currencies, led by South Africa’s rand, advanced after a U.S. report showed consumer confidence in the world’s largest economy improved this month.

“The longer-term refinancing operation is likely to loosen liquidity issues even more and the euro is consolidating ahead of what’s likely to be a breakout above $1.35,” Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto, said referring to the ECB loan program. “The market reaction by and large has been better toward the more positive implications on risk sentiment.”

The euro rose 0.5 percent to $1.3458 at 5 p.m. in New York. It added 0.3 percent to 108.29 yen. The dollar weakened 0.2 percent to 80.46 yen.

The Standard & Poor’s 500 Index rose 0.3 percent and the Dow Jones Industrial Average closed above 13,000 for the first time since 2008.

The South African rand rose 1.1 percent to 7.4716 per dollar and reached 7.4700, the strongest since Sept. 19. The Norwegian krone added 0.7 percent to 5.5665 per dollar after reaching 5.5513, the strongest level since Nov. 1.

Refinancing Operation

After lending euro-region banks a record 489 billion euros ($658 billion) in its first longer-term refinancing operation, or LTRO, on Dec. 21, the Frankfurt-based ECB tomorrow will probably grant them another 470 billion euros this week, according a Bloomberg News survey.

Banks can borrow from the ECB at around 1 percent and invest the proceeds in higher-yielding securities such as the 10-year Italian government bond, yielding 5.35 percent.

The euro pared its gain after Kenny said the Irish government decided to hold a vote after receiving legal advice from the state’s attorney general. The government has to hold a referendum should a treaty change the country’s existing constitution. In contrast to two previous Irish referendums on European policies, a veto wouldn’t sink the treaty, which requires support from 12 of the 17 euro countries to take effect.

“The risk is that the vote goes against it,” said Kit Juckes, head of foreign-exchange research at Societe Generale SA in London. “That doesn’t scupper the scheme -- they can go back and vote again, of course -- but it doesn’t help.”

‘General Risk-On’

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, fell 0.4 percent to 78.253 after touching 78.189, the lowest since Dec. 8.

The Conference Board’s U.S. consumer confidence index climbed to 70.8 this month, a 12-month high, from 61.5 in January, figures from the New York-based private research group showed. Economists in a Bloomberg News survey projected the gauge would climb to 63.

“There’s a general risk-on, equity-market-gains kind of background,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York.

The yen rose against the dollar and pared its losses against riskier currencies after a report showed orders for U.S. durable goods fell in January by the most in three years. The 4 percent drop exceeded a 1 percent decline forecast by economists in a Bloomberg News survey.

Pound Advances

The dollar has weakened 4 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The yen is the worst performer, falling 8.7 percent, and the euro gained 0.1 percent.

The pound approached a three-week high against the dollar after the Confederation of British Industry said its retail sales gauge rose in February to the highest reading in eight months, boosting speculation the nation will avoid a recession.

The gauge increased to minus 2 from minus 22 the previous month, the London-based business lobby said in a report today. A measure of expected sales for next month was at 2, indicating retailers expect sales to improve in March, the report showed.

The pound rose 0.5 percent to $1.5901 after reaching $1.5908, the strongest level since Feb. 8. The U.K. currency was little changed at 84.64 pence per euro.

‘Dollar Depreciation’

The 7.5 percent surge in oil prices so far this year may benefit the euro and other European currencies more than the dollar as oil-producing nations invest in European goods and assets, Alessio de Longis, a portfolio manager at Oppenheimer Funds in New York, said in an interview with Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.”

“Oil-producing countries reimport about twice as much from the euro zone and other European countries than they do from the U.S. and that’s why there’s this generalized dollar depreciation even against European countries that do no export oil,” he said. “With this kind of environment in energy markets, the euro could easily reach $1.40.”

Crude fell 1.3 percent to $106.53 today after rallying to $109.95 a barrel last week, the highest level since May 4.

Treasuries owned by oil producers and institutions such as U.K. banks that are proxies for Middle East nations fell to $761 billion in December from a record high of $770.8 billion reached the previous month, according to data compiled by the Treasury Department.

The ECB’s auction tomorrow may strengthen the euro initially, but the gains won’t be sustainable, according to Barclays Plc.

‘Weaken the Euro’

In a survey of 204 clients, including institutional asset managers, banks, hedge funds and reserve managers, Barclays found that 42 percent of respondents expect the take-up in the ECB’s auction tomorrow to range from 450 billion euros to 600 billion euros, according to a client note by currency-market strategists Aroop Chatterjee and Jose Wynne.

While 46 percent of survey respondents said that a large auction take-up will benefit the euro, Barclays said the euro will weaken after appreciating to $1.35-$1.37.

“We still expect the LTRO to ease financial conditions in Europe, which should weaken the euro,” Wynne said via e-mail. “But the initial reaction is euro-up, because it would be risk-on.”

Investors should bet on higher-yielding currencies such as the Mexican peso, Brazilian real and South African rand, funded with dollars, through the auction and then switch to euro funding once it’s over, Wynne said.

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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