Euro Rises Versus Most Major Peers Amid ECB Stimulus Bets

Euro Heading for Monthly Loss Before Jobs, Manufacturing Data
Jobseekers queue to enter an employment center in Madrid. The jobless rate in the euro area probably rose to 11.2 percent in June from 11.1 percent in May, the highest on record, according to median estimate of economists surveyed by Bloomberg News before the statistics office releases data today. Photographer: Angel Navarrete/Bloomberg

The euro rose against most of its major counterparts on speculation the European Central Bank will take steps at a meeting this week to stem the rise of the region’s sovereign-bond yields.

The shared currency pared gains after the German Finance Ministry said in an emailed statement it saw no need to give Europe’s rescue fund a banking license. The euro gained last week after ECB President Mario Draghi pledged to do whatever it takes to preserve the currency. The pound dropped for the first time in four days against the euro after Moody’s Investors Service lowered its forecast for U.K. economic growth.

“There are more positive scenarios for the euro than negative this week,” said Greg Anderson, North American head of G-10 currency strategy at Citigroup Inc. in New York. “The reactivation of bond buying by the ECB is reasonably likely because of the hints that Draghi has dropped along that direction, and the market has clearly reacted in anticipation.”

The euro gained 0.3 percent to 96.12 yen at 5 p.m. New York time. The shared currency advanced 0.4 percent to $1.2304, and strengthened as much as 0.6 percent. The dollar was 0.1 percent weaker at 78.12 yen.

Britain’s pound sank 0.6 percent to 78.48 pence per euro and declined 0.2 percent to $1.5678. Moody’s, in a credit opinion in London, cited “rising challenges in achieving debt reduction within the timeframe that has been laid out by the government.”

Sterling fell 0.2 percent against the greenback this month.

Worst Performer

The euro lost 3.1 percent in the past month against nine developed-market peers monitored by Bloomberg Correlation-Weighted Indexes, the worst performance. The yen gained 2.5 percent, and the dollar rose 0.1 percent.

The greenback remained lower versus the euro today after data showed U.S. consumer spending stagnated in June, supporting bets the Fed will expand its balance sheet to stimulate the economy. Household purchases, which account for about 70 percent of the economy, were unchanged after a 0.1 percent decrease the prior month that was previously reported as little changed, Commerce Department data showed today in Washington.

“We expect a third round of easing to come in September, and our economists expect strong language hinting at that tomorrow,” said Mary Nicola, a New York-based currency strategist at BNP Paribas SA. “Our expectations would be risk on but it would be slightly muted in the FX world because of the upcoming ECB.”

Quantitative Easing

While the Fed, which ends a two-day meeting tomorrow, refrained from introducing a third round of asset purchases known as quantitative easing at its June meeting, Bernanke indicated it’s an option. The central bank bought $2.3 trillion of securities in two rounds from 2008 to 2011 to spur growth, and it has said its benchmark interest rate will stay at “exceptionally low levels” at least through late 2014.

The euro slid 2.9 percent against the dollar this month. It touched $1.2043 on July 24, the lowest level since June 2010.

“It will be a continuous grind lower from here,” Adam Cole, global head of foreign-exchange strategy at Royal Bank of Canada’s RBC Capital Markets unit, said in a radio interview on “Bloomberg - The First Word” with Ken Prewitt. “We think it trades down to and through $1.20, and that’s the story for several months rather than weeks into the future.”

Hollande Pledge

French President Francois Hollande buoyed the shared currency earlier, saying all will be done to defend and preserve it. He and Italian President Mario Monti issued a joint statement after meeting in Paris today.

One-month options show that the premium for euro puts, which grant the right to sell the currency versus the dollar, over calls, which confer the right to buy, increased today. The so-called 25-delta risk reversals were at minus 1.1 percent, from minus 0.4 percent on July 19.

Yields on Spanish government 10-year bonds rose to a euro-era record of 7.75 percent on July 25 amid speculation the nation would need a bailout. They traded at 6.75 percent today. Italian 10-year yields touched 6.71 percent, a seven-month high, on July 25 and were at 6.08 percent today.

Ewald Nowotny, an ECB council member, said last week there were arguments in favor of giving Europe’s bailout fund a banking license. That would allow it to increase its firepower through access to ECB funds.

Draghi Proposal

Draghi has a proposal that involves the European Financial Stability Facility buying government debt on the primary market, buttressed by ECB purchases on the secondary market to ensure lenders transmit its record-low interest rates, two central bank officials said on July 27 on condition of anonymity. Further ECB interest-rate cuts and long-term loans to banks are also up for discussion, one of the officials said.

“There’s a very high risk for disappointment,” said Lutz Karpowitz, a senior foreign-exchange strategist at Commerzbank AG, by phone from Frankfurt. “In the foreign-exchange market there’s a lot of expectations priced in already.”

The ECB meets in Frankfurt on Aug. 2.

Currencies of nations with higher interest rates headed for monthly advances as speculation that the Fed and the ECB may extend liquidity operations spurred appetite for higher-risk currencies.

The Aussie dollar climbed 2.6 percent this month, beating all of its 16 most-traded counterparts. The currency touched $1.0538 today, the highest level since March 27, before trading at $1.0503. It fell 0.4 percent to A$1.1714 per euro.

Canada’s currency gained 1.4 percent in July against the dollar. It slipped 0.2 percent today to C$1.0031 to the greenback after data showed the nation’s gross domestic product grew 0.1 percent in May, less than economists forecast.

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