Euro Gains for 2nd Day on Optimism Leaders Near Solution

The euro rose for a second day versus the dollar as traders said the shared currency’s decline may have been too quick after European leaders agreed to discuss closer banking cooperation in the euro bloc.

The 17-nation currency gained from a more than 11-year low against the yen amid speculation that traders were unwinding wagers the shared currency would decline. The dollar strengthened against the yen as Treasury yields rose for the first time in four days, from record lows. Australia’s dollar fell as investors bet the central bank will cut rates at meetings tomorrow. Canada’s dollar weakened as policy makers are expected to back away from interest-rate increases this week.

“Talk of banking cooperation calms the market,” said Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in New York. “It’s a short-term calm and the market will challenge them. Traders have pushed the bearish thematic as much as they can and it’s a week to settle down.”

The euro rose 0.5 percent to $1.2499 at 5 p.m. New York time. It fell to as low as $1.2288 on June 1, the weakest level since July 1, 2010. Europe’s shared currency climbed 1 percent to 97.93 yen. On June 1 it reached 95.60, the least since November 2000. The dollar gained 0.4 percent to 78.34 yen.

Markets were closed in London in celebration of the Queen’s diamond jubilee.

Technical Levels

The 14-day relative strength index for the euro versus the dollar rose above 30 for the first time in nine-days, ending the longest streak since 2008. The level indicates an asset’s decline may have been too fast.

Futures traders increased net bets against the euro versus the dollar to a record high for a third week. So-called net shorts rose by 8,054 to 203,415 contracts in the period ended May 29, Commodity Futures Trading Commission data showed.

“The euro shorts, which are at a record, are being squeezed,” Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. “Some of the momentum traders have to get out. There’s nothing fundamental behind it -- it’s some momentum squaring up.”

Canada’s dollar rose 0.2 percent to C$1.0394 after touching C$1.0447, the weakest level since Nov. 28. Bank of Canada Governor Mark Carney said last month interest-rate rises may be necessary as growth outpaces his earlier projections. Investors are now pricing in as many as 34 basis points, or 0.34 percentage point, of central-bank easing by December as the central bank will have to react to a worsening global economy.

Real Weakness

Brazil’s real fell against all its major counterparts, declining 0.9 percent to 2.0585 per dollar. Policy makers cut the target lending rate by a half-percentage point to a record low 8.5 percent last week, citing “fragility” abroad that is having a “disinflationary” effect on Latin America’s biggest economy.

In Australia, interest-rate swaps indicate better-than-even chances the Reserve Bank of Australia will lower its 3.75 percent overnight cash-rate target to 3.25 percent tomorrow and to a record 2.25 percent by November.

Net shorts for the Australian dollar also climbed to an all-time high last week, rising to 35,527. The so-called Aussie rose 0.3 percent to 97.28 U.S. cents today after dropping as much as 0.8 percent.

The Aussie has had the biggest year-to-date decline against nine-developed nation counterparts, as tracked by the Bloomberg Correlation-Weighted Indexes. The 2.7 percent loss is followed by the 1.8 percent decline in the Swedish krona and 1.4 percent retreat in the euro.

Euro Talks

European Commission President Jose Barroso and German Chancellor Angela Merkel agreed to discuss proposals on banking coordination when they meet today in Berlin.

The shared currency’s breakout suggests a possible climb to $1.2620 MacNeil Curry, head of foreign-exchange and interest-rates technical strategy at Bank of America Corp. in New York wrote to clients.

“Do not be fooled by near-term strength,” he wrote. “Gains remain corrective before a resumption of the larger downtrend for $1.2143 and below.”

The commission, the European Union’s executive, last week called for a “banking union” that would integrate supervision of lenders more tightly and create a pool of EU funds to clean up banks with cross-border exposure. The Brussels-based commission also proposed that the euro’s permanent bailout fund inject cash to banks instead of channeling the money through national governments.

German Views

Germany views jointly issued bonds in the euro area as an unsuitable measure to overcome the debt crisis at this time, government spokesman Steffen Seibert told reporters in Berlin.

“The discussion in Europe on what needs to be done has become very public,” said Aroop Chatterjee, a currency strategist at Barclays Plc’s Barclays Capital unit. in New York. “Euro-dollar had sold off quite a bit last week so we are seeing some retracement.”

The dollar snapped a three-day drop against the yen after Japanese Finance Minister Jun Azumi pledged on June 1 to take “decisive action” on his nation’s currency should “excessive moves” persist. Azumi declined to comment on whether Japan has intervened in the currency market at a news conference.

Japan’s Vice Finance Minister for International Affairs Takehiko Nakao said today he discussed currencies with Bank of Japan Executive Director Hiroshi Nakaso as part of an exchange of views on global markets.

The yen was also buoyed as the premium received or investing in U.S. debt instead of Japanese securities widened. The so-called yield spread rose to 70 basis points from a record low 63 basis points June 1.

U.S. 10-year Treasury yields rose seven basis points to 1.52 percent. The benchmark reached a record 1.4387 percent on June 1.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, was 0.4 percent lower at 82.536.

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