Euro Gains as Greeks Back Pro-Bailout Parties; Yen Falls

Euro Strengthens Versus Dollar Before Italian, German Debt Sales
The euro has weakened 3.6 percent in the past six months, the worst performance among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. Photographer: Chris Ratcliffe/Bloomberg

The euro rose to the strongest in almost a month as official projections showed pro-bailout parties won enough seats to control Greece’s parliament, easing concern the country would be forced from the currency bloc.

The 17-nation euro extended last week’s 1 percent jump versus the dollar after figures from Greece’s Interior Ministry indicated New Democracy has the ability to form a majority government with Pasok. The dollar and yen declined against most major counterparts as Asian stocks advanced, sapping demand for so-called safe-haven currencies.

“The two pro-austerity groups getting a majority together in the parliament is a very good outcome,” said Daisuke Karakama, a market economist in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan’s third-largest banking group by market value. “It’s the best-case scenario for the election, prompting traders to cover short positions in the euro,” he said referring to bets that an asset’s price will fall.

The euro reached $1.2748, the most since May 22, before trading at $1.2710 as of 6:44 a.m. in London, up 0.6 percent from the close in New York last week. It sank to $1.2288 on June 1, the weakest level since July 2010. The euro jumped 1.2 percent to 100.65 yen and gained 0.6 percent to 80.90 U.K. pence after touching 79.68, the weakest since May 16.

The dollar rose 0.6 percent to 79.19 yen and weakened 0.5 percent versus the Swiss franc to 94.51 centimes. It fell 0.6 percent to $1.0113 per Australian dollar.

Greek Ballot

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, slid 0.3 percent to 81.364. The gauge earlier declined to 81.161, the lowest since May 22.

While 21 parties were on the Greek ballot yesterday, the main contest was between Syriza leader Alexis Tsipras, who has promised to renege on budget cuts demanded by creditors, and New Democracy’s Antonis Samaras, who has said his challenger was risking an exit from the currency union. Greece was left with a political stalemate after the previous general election on May 6.

Since the initial vote, the euro weakened 4.8 percent against the yen and lost 3.4 percent versus the dollar through last week as investors sought havens from the turmoil. The crisis escalated on June 9 when Spain asked for a bailout of as much as 100 billion-euro ($127 billion) to prop up its banks, becoming the fourth member of the trading bloc to request international aid.

‘Broadly Positive’

The outcome of the Greek elections “is broadly positive, but I think what you have to acknowledge is that a lot of Europe’s problems still remain,” said Robert Rennie, chief currency strategist at Westpac Banking Corp. in Sydney. “There’s still a lot of unknowns in terms of the outlook for Europe. I don’t think those question marks have really changed.”

European governments indicated a willingness to adjust the terms of Greece’s bailout package as long as a new government “swiftly” emerges from the election.

Greece’s international monitors will “return to Athens as soon as a new government is in place to exchange views with the new government on the way forward,” euro-area finance ministers said in an e-mailed statement following the vote.

Through most of the financial and political turmoil in Europe, the euro has held above its lifetime average of about $1.21 as investors put their faith in Germany’s Merkel to keep the monetary union in place.

“The euro has been trading above $1.27 on the back on a possible coalition on the right side of austerity measures,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank in London.

Shorts Pared

While forecasting little change in the euro versus the dollar, a majority of the world’s biggest foreign-exchange trading firms surveyed last month by Bloomberg News said the loss of a member such as Greece would risk more departures and send the currency lower.

The median year-end estimate for the euro is $1.25, according to more than 50 analyst estimates compiled by Bloomberg. The forecast has come down from $1.30 as recently as May 18.

Hedge funds and other large speculators reduced trades that would profit from a drop in the euro against the dollar last week from a record the week before, figures released on June 15 by the Washington-based Commodity Futures Trading Commission showed.

The difference in the number of wagers on a drop in the euro against the greenback versus those on an advance was 195,187 contracts on June 12, from 214,418, the data showed.

Smaller Union

The premium for three-month options granting the right to sell the euro against the dollar relative to those allowing for purchases was 2.83 percentage points at the end of last week, up from a low this year of 1.41 percentage points in March. The so-called risk reversal rate has eased from 3.47 percentage points last month.

The implied volatility for one-month euro-dollar options, which indicates expected swings in the underlying currencies, reached a high of 13.29 percent last week. While that’s up from 8.25 percent in April, it’s below last year’s peak of 18.42 in September. The JPMorgan G7 Volatility Index rose to 11.88 this month from 8.84 in April, the least since November 2007.

The most probable outcome is the euro will evolve into a smaller union, including France, Germany, Italy and Spain, and underpinned by stronger coordination and financing, Pacific Investment Management Co. Chief Executive Officer Mohamed El-Erian wrote in a May 15 report outlining the Newport Beach, California-based company’s medium-term economic outlook.

Rather than a euro failure, an orderly Greek exit from the currency has Nobel laureate Joseph Stiglitz predicting a stronger and more stable monetary union.

Merkel, Sarkozy

“If you can weather the storm and haven’t put your bets too short term, probably the euro is going to go up,” Stiglitz, a professor at Columbia University and winner of the 2001 Nobel Prize in economics, said in a June 4 interview at Bloomberg’s New York headquarters. “It’s likely there will survive some rump version,” centered on Germany, he said. If it includes countries such as France, the “euro would likely appreciate.”

The euro is down from this year’s high of $1.3487 on Feb. 24, and has depreciated about 6.1 percent in the past 12 months against a basket of nine developed-market peers, according to Bloomberg Correlation-Weighted Indexes.

For much of the crisis, speculating on a weaker euro meant betting against the ability of Merkel and then-French President Nicolas Sarkozy to keep the currency union together. They said in a September statement that “it is more than ever indispensable” to “assure the stability of the euro zone.”

French Elections

Sarkozy became the first French president in 30 years to fail to win re-election. The standing of Hollande’s Socialist Party was further bolstered following yesterday’s parliamentary election in France. The party and its allies won an absolute majority in the National Assembly, exit polls showed, paving the way for them to pass legislation without the aid of other members of parliament.

In Germany, Merkel’s Christian Democratic Union had its worst-ever result in an election last month in the country’s most populous state.

Of Greece’s 266 billion euros of debt, about 194 billion euros, or 73 percent, is held by the European Central Bank, euro-area governments and the IMF, according to the Greek debt management office in Athens. In 2010, before the first bailout, Greece owed about 310 billion euros, all to the private sector.

Greek Restructuring

Greece completed the largest bond restructuring in history in March, as holders forgave more than 100 billion euros of debt.

Since then, Greek bonds issued under the terms of the deal have slumped. The 2 percent note due February 2023 was at 16.42 percent of face value on June 15, down from 28.68 percent on March 15. The bonds yielded 27.13 percent last week.

German two-year yields turned negative for the first time on June 1, while 10-year rates touched an all-time low of 1.127 percent the same day.

“It’s still a long road for Greece,” said Simon Smith, chief economist at foreign-exchange broker FXPro Group Ltd. in London. “We are bearish euro.”

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