Euro Gains on Speculation Leaders Acting to Solve Crisis

The euro strengthened against all of its most-traded counterparts as German Chancellor Angela Merkel reiterated her commitment to working with the European Central Bank to resolve the region’s financial turmoil.

The shared currency gained earlier after Medley Global Advisors said Spain will request a bailout that will allow the ECB to buy the nation’s debt to help reduce surging borrowing costs. The greenback climbed for a fourth day against the yen as Treasury yields at three-month highs boosted the allure of U.S. dollar-denominated assets. The pound strengthened against most of its major peers after U.K. retail sales unexpectedly increased last month.

“Merkel’s comments pushed the euro near session highs versus the dollar and the yen,” Omer Esiner, chief market analyst in Washington at the currency brokerage Commonwealth Foreign Exchange Inc., said in a telephone interview.

The euro rose 0.5 percent to $1.2356 at 5 p.m. New York time. The 17-nation shared currency added 1 percent to 98.04 yen. The dollar rose 0.5 percent to 79.33 yen after reaching 79.41 yen, the strongest level since July 12.

The difference between the yield on the 10-year U.S. benchmark and a similar maturity Japanese security widened to 100 basis points yesterday, the most since May 10. It was at 97 basis points today. The yield on the 10-year Treasury note touched 1.86 percent, the highest since May 11.

The dollar is poised to test resistance at 79.80 yen and could reach 80.50 to 80.60, Cilline Bain, a London-based technical analyst at Credit Suisse Group AG, wrote today in a note to clients.

‘In Line’

Spain will apply for aid at a meeting of finance ministers and central bank governors next month, allowing the ECB to buy Spanish government debt in the secondary market once approval is won, according to a Medley report Bloomberg News obtained. Medley officials weren’t immediately available to comment.

The report “reminded everybody that in their view the Spaniards will eventually ask for a bailout, and with a bailout will likely come some ECB buying, which is likely to smack bond yields,” Thomas Molloy, chief dealer at FX Solutions LLC, an online currency-trading company in Saddle River, New Jersey, said in a telephone interview.

Merkel said the European Central Bank’s insistence on conditionality in return for help to lower borrowing costs in indebted countries matches Germany’s priorities to end the crisis in the euro region.

“The ECB is completely in line with what we’ve said all along,” Merkel told reporters in Ottawa today at a joint press conference with Canadian Prime Minister Stephen Harper.

Kiwi, Pound

The New Zealand Dollar advanced against most of its major counterparts as rallying commodities supported the outlook for exports. The so-called kiwi appreciated 0.4 percent to 81.05 U.S. cents. It rose 0.9 percent to 64.30 yen.

Auckland-based Fonterra Cooperative Group Ltd., the world’s largest dairy exporter, said whole-milk powder prices reached a two-month high. since July 27. The Thomson Reuters/Jefferies CRB Index of raw materials rose for a third day, gaining 0.3 percent.

The British pound climbed as July’s increase in U.K. retail sales added to evidence that the economic slump was less pronounced than previously estimated.

Sterling fell 0.2 percent to 78.54 pence per euro after reaching 78.13 pence, the strongest level since July 31. The pound gained 0.3 percent to $1.5733. It weakened as much as 0.3 percent before the data.

Economic Data

The dollar climbed earlier as building permits jumped to the highest level in four years and jobless claims held steady, reducing speculation the Federal Reserve will extend stimulus next month.

“None of the data has been such that it would really have people change their outlook for the U.S. economy or for that matter what the Fed could do,” said Brian Kim, a currency strategist at Royal Bank of Scotland Group Plc in Stamford Connecticut.

The U.S. central bank has held its target for overnight lending in a range of zero to 0.25 percent since 2008 and plans to keep it there at least through late 2014 to stimulate the world’s biggest economy. The Fed bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of quantitative easing, also known as QE1 and QE2.

Dallas Fed President Richard Fisher said in a CNBC interview yesterday that the U.S. economy probably won’t lapse into recession in 2013 and that new stimulus wouldn’t spur growth.

Treasuries Buying

The yen has declined against the dollar as higher yields in the U.S. prompted Japanese investors to buy assets abroad.

Investors in Japan bought $10.4 billion of Treasuries in June, bringing their purchases for 2012 to $61.3 billion and total holdings of the debt to $1.1193 trillion, Treasury data released yesterday show.

That compares with China’s addition of $300 million to its portfolio of U.S. government securities for the month, raising its purchases this year to $12.4 billion and its stake in Treasuries to $1.1643 trillion. Should both countries continue buying at their respective paces through 2012, Japan will end the year with more Treasuries.

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