Euro Gains Against Majors on Optimism for ECB Crisis Prospects

The euro gained against all of its most-traded counterparts this week amid optimism that European leaders are moving closer to agreement on solving the region’s debt crisis.

The 17-nation shared currency touched a six-week high versus the yen after German Chancellor Angela Merkel yesterday backed European Central Bank Chief Mario Draghi’s conditions for helping reduce borrowing costs in indebted countries. It erased a gain against the dollar as German bonds grew the most expensive in two months versus equivalent U.S. debt. Australia’s dollar snapped a two-day gain versus the greenback as the government said the central bank can ease monetary policy if gains hurt the economy.

The euro was buoyed by suggestions that the ECB “will buy bonds as soon as anyone comes to the European Financial Stability Fund to ask for help,” Kit Juckes, the head of foreign-exchange research at Societe General SA, said in a telephone interview. “At some point, maybe we’ll get bored again of nobody asking for help, but that’s definitely a factor which I think has helped the general mood.”

The euro rose 0.1 percent to 98.13 yen at 5 p.m. New York time, after climbing to 98.41, the most since July 6. It fell 0.2 percent to $1.2334. Japan’s currency dropped for a fifth day against the dollar, retreating 0.3 percent to 79.56.

Canada’s dollar weakened against its U.S counterpart for the first time in four days as inflation slowed in July, adding to evidence the nation’s economy is moving away from full capacity. It fell 0.3 percent to 98.93 cents per U.S. dollar.

Colombia’s peso dropped for an eighth day, its longest streak since August 2008, on speculation officials will take more measures to stem its rally. The peso depreciated less than 0.1 percent to 1,819.77 per U.S. dollar, paring its rally this year to 6.5 percent, the largest among global counterparts after the Hungarian forint and the Chilean peso.

Euro, Yen

The euro gained 2 percent versus the yen this week, the most since the period through June 8. It added 0.4 percent against the dollar. The yen fell 1.6 percent versus the greenback, its biggest weekly drop since the five days ended June 22.

“Euro-yen has historically been a good barometer for risk appetite,” Blake Jespersen, managing director of foreign exchange in Toronto at Bank of Montreal, said in a telephone interview. “Improved market sentiment is benefiting that cross in particular. That pair has really been a proxy for overall risk sentiment, and as a result, you’re seeing a good run up.”

Draghi said on Aug. 2 that the ECB might buy government bonds to help lower borrowing costs in countries such as Spain and Italy, though only in return for strict conditions and if governments act first by buying debt through Europe’s bailout funds. Spain and Italy have yet to say whether they will request aid.

‘Negative Consequences’

Merkel, who is due to meet French President Francois Hollande on Aug. 23 and Greek Prime Minister Antonis Samaras a day later, is considering easing Greece’s bailout terms, two German lawmakers said.

“Obviously time is pressing” on stamping out the debt crisis, though “on many of these issues we feel we’re on the right track,” she told reporters in Ottawa yesterday at a press conference with Canadian Prime Minister Stephen Harper.

The euro gained 0.6 percent this week, the best performer alongside the Swiss franc among the 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen declined 1.6 percent and the dollar gained 0.2 percent.

Yield Spread

The difference in yields between U.S. and German 10-year bonds today reached its widest point since June 6, at 32 basis points, or 0.32 percentage point. The spread could put downward pressure on the euro by making German debt less attractive, Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York, said in a telephone interview.

“Yields in the U.S. are increasing compared to Germany, which could put some pressure on the euro,” St-Arnaud said.

The euro zone’s current account climbed to a seasonally adjusted 12.7 billion euros ($15.7 billion) in June from 10.3 billion euros the previous month, according to data from the European Central Bank in Frankfurt.

“Money flows within the zone but doesn’t head for the hills,” Societe Generale’s Juckes said. “If we haven’t triggered proper capital flight yet, will we ever? And if we don’t, the euro’s fall will continue to be very, very slow.”

Nomura forecasts that the euro will fall to $1.18 versus the greenback by the end of the third quarter and $1.15 by year end. Societe Generale sees the euro at $1.23 by the end of the third quarter and $1.21 at year end.

Aussie Drop

Australia’s dollar fell 0.9 percent to $1.0420, the biggest one-day drop since July 23. For the week, it fell 1.5 percent, the biggest drop since May 18.

Models used by the International Monetary Fund and other analysts show, “the Australian dollar is overvalued compared to its medium- to long-run equilibrium value,” according to the Treasury report on its website today. The Reserve Bank of Australia will next week release minutes of its Aug. 7 meeting, where policy makers left the key interest rate at 3.5 percent.

The Aussie fell against 15 of its 16 major counterparts today as China’s economy showed signs of slowing. Gross domestic product is forecast to increase 8.2 percent this year, a percentage point less than in 2011, according to the median estimate of economists surveyed by Bloomberg.

‘Cut Rates’

“The Treasury highlighted that if the strength of the Australian dollar is impacting the economy, then the central bank would have full capacity to cut rates,” said Camilla Sutton, chief currency strategist at Bank of Nova Scotia’s Scotiabank unit in Toronto, said in a phone interview.

The euro may strengthen against the Australian dollar to the highest level in more than a month if it breaks through resistance at A$1.1860 to A$1.1935, according to JPMorgan Chase & Co., citing technical indicators. If it breaches this resistance, it may rise to A$1.20 to A$1.21, a level last passed on July 13. It was up 0.5 percent at A$1.1814 today.

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