The euro had the biggest weekly gain versus the dollar since February as European Central Bank officials and national leaders pledged to support the shared currency mid surging sovereign-bond yields and concern the region’s financial crisis is worsening.
The dollar dropped against most major peers as a government report showed U.S. economic growth slowed in the second quarter and the Federal Reserve prepared to meet next week. The ECB and Bank of England will also meet next week. The South African rand and New Zealand dollar climbed as risk appetite increased and stocks rallied.
“The euro has done quite well this week,” Shaun Osborne, chief currency strategist at Toronto-Dominion Bank’s TD Securities unit in Toronto, said in a telephone interview. “Yields running up in Italy and Spain prompted the ECB to be a little bit more proactive in their management of this issue.”
The 17-nation currency strengthened 1.4 percent to $1.2322 this week in New York, paring its monthly loss to 2.7 percent. It was the first weekly gain since June 29 and the biggest since Feb. 24. The euro appreciated versus the yen for the first time in five weeks, rising 1.3 percent to 96.67. Japan’s currency was little changed against the dollar at 78.46.
Futures traders decreased bets the euro will fall against the dollar, Commodity Futures Trading Commission data showed. The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 155,066 on July 24, compared with 167,249 a week earlier. Net shorts reached a record 214,418 on June 8.
South Africa’s rand was the biggest winner among its 16 most-traded counterparts tracked by Bloomberg, climbing 1.6 percent to 8.1570 per dollar.
New Zealand’s dollar strengthened 1.3 percent, the most since the week ended June 29, to 80.97 U.S. cents. It touched 81.06 cents yesterday, the highest level since May 3. The Australian dollar appreciated 1 percent to $1.0483 and reached $1.0487 yesterday, the strongest since March 27.
Implied volatility on three-month options for Group-of-Seven currencies fell toward the lowest level in more than four years, according to the JPMorgan G7 Volatility Index, touching 9.06 percent yesterday. It reached 8.32 percent on July 20, the lowest since 2007, before rising to 9.83 July 24. The five-year average is 12.4 percent.
Lower volatility makes investments in currencies of nations with higher benchmark interest rates more attractive because the risk in such trades is that market moves will erase profits. Key rates are 5 percent in South Africa and 3.5 percent in Australia, versus zero to 0.25 percent in the U.S. and 0.75 percent in the euro region.
The Standard & Poor’s 500 Index rallied 1.7 percent in its biggest weekly gain since June.
The euro touched a three-week high against the greenback yesterday after German Chancellor Angela Merkel and French President Francois Hollande said they’ll do “everything” necessary to protect the single currency. Germany and France are “bound by the deepest duty” to keep the 17-nation bloc intact, they said in a joint statement.
The pledge followed a similar promise a day earlier by European Central Bank President Mario Draghi. Ewald Nowotny, an ECB council member, said July 25 there were arguments in favor of giving Europe’s permanent bailout fund a banking license, which would give it more firepower.
Borrowing costs in Spain have surged amid concern the nation may need a bailout, with 10-year government-bond yields exceeding the 7 percent threshold for rescues for Greece, Portugal and Ireland. The yields reached 7.75 percent on July 25, a euro-era record, before falling to 6.74 percent yesterday. Italian 10-year yields reached 6.71 percent on July 25 before ending the week at 5.96 percent.
Draghi and Bundesbank President Jens Weidmann will meet in coming days in an effort to overcome the biggest stumbling block to a new raft of measures to stem the region’s debt crisis, including bond purchases, two central-bank officials said. They requested anonymity because the talks are private.
The ECB chief’s proposal involves Europe’s rescue funds buying government bonds on the primary market, flanked by ECB purchases on the secondary market to ensure transmission of its record low interest rates, the officials said.
The euro later pared gains amid concern over whether such a plan is achievable.
“This is a lot to promise in a short amount of time, and people are wondering if Draghi is overreaching,” said Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York.
The dollar rose against the yen yesterday after U.S. economic growth slowed less in the second quarter than economists forecast, damping bets the Fed will take more stimulus action next week.
U.S. gross domestic product, the value of all goods and services produced, rose at a 1.5 percent annual rate after a revised 2 percent gain in the prior quarter, Commerce Department figures showed in Washington. The median forecast in a Bloomberg News survey was for 1.4 percent.
“It’s not a number that’s going to prompt the Fed into another round of quantitative easing,” Omer Esiner, chief market analyst in Washington at the currency brokerage Commonwealth Foreign Exchange Inc., said yesterday.
The Fed opens a two-day meeting on July 31. While policy makers refrained from introducing a third round of asset purchases at their session last month, Chairman Ben S. Bernanke indicated it’s an option. The central bank bought $2.3 trillion in assets in two rounds of the strategy called quantitative easing from 2008 to 2011 to spur the economic recovery.
“We know what the state of the U.S. economy is, and the report really is not a surprise,” Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York, wrote yesterday in a note to clients, referring to the GDP data. “Bernanke and crew have repeatedly stated that they are concerned and are standing by to take further action. We remain unsure what the benefit of prolonging the wait might be.”