Euro Advances Most in Six Months as Fed Signals More Stimulus

The euro had its largest weekly gain against the dollar in six months as the Federal Reserve signaled it’s increasing likely to try to stimulate economic growth and amid growing optimism Europe’s leaders will contain its crisis.

The 17-nation shared currency gained for a second week as German Chancellor Angela Merkel said she wants Greece to stay in the monetary union and that her nation is ready to help the Greek government take the needed steps to resolve its economic woes. The euro on Friday snapped four days of gains after European Central Bank President Mario Draghi’s plan to buy government bonds was said to be held up pending a German court ruling. Fed Chairman Ben S. Bernanke is to speak on Aug. 31 in Jackson Hole, Wyoming, where he may clarify his thinking on the need for stimulus.

“The Fed’s dovish tone definitely put people on watch,” Brian Kim, a currency strategist at Royal Bank of Scotland Group Plc in Stamford Connecticut, said in a telephone interview yesterday. “That meeting took place before the latest payroll data, before the latest consumer spending data. People said, well, we have to take that into consideration. It definitely puts more onus on the Jackson Hole speech.”

The euro rose 1.4 percent this week to $1.2512, its largest weekly gain since the five days ended Feb. 24. The shared currency climbed to $1.2590 Aug. 23, the strongest since July 4. The euro gained 0.3 percent to 98.44 yen, the second weekly advance. The dollar weakened 1.1 percent to 78.67 yen.

Fed Minutes

The Federal Open Market Committee said “additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery,” according to the record of the policy makers’ July 31-Aug. 1 gathering released Aug. 22 in Washington.

Employers added 163,000 workers last month, the biggest gain since February, according to the Labor Department jobs report issued earlier this month. Americans’ paychecks in the first half of 2012 grew at the fastest pace in five years, according to calculations by UniCredit Group in New York, based on data from the Commerce Department, pointing to an improvement in purchasing power that may help propel the economic expansion.

Fed officials next meet on Sept. 12-13. Bernanke signaled a second round of bond buying by the Fed at Jackson Hole in 2010.

“Bernanke is likely to come off as more able and ready to act than Draghi,” Noel Hebert, chief investment officer at Bethlehem, Pennsylvania-based Concannon Wealth Management LLC, which oversees about $250 million. “But, at this point, I would argue the Fed policy transmission mechanism is in the repair shop and movement from the ECB has more fundamental weight.”

‘Mildly Optimistic’

Draghi announced on Aug. 2 that the central bank may intervene in the secondary market to reduce bond yields. Central bankers may wait until Germany’s Constitutional Court rules on the legality of Europe’s permanent bailout fund before unveiling full details of his plan to buy government bonds, two central bank officials said.

With the court set to rule on Sept. 12, investors looking for Draghi to announce a definitive purchase program at his Sept. 6 press conference might be disappointed, according to the officials, who spoke on condition of anonymity because the deliberations are not public.

“The market continues to digest those early August announcements from the ECB,” Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York, said in a telephone interview. “It may have shifted sentiment from skeptical to mildly optimistic.”

Greece, Spain

Merkel said Germany is ready to help Prime Minister Antonis Samaras’s government as it takes the necessary steps to resolve his country’s economic woes.

“I want Greece to stay in the euro zone and that’s what I’m working for,” Merkel told reporters in Berlin yesterday at a joint press conference with Samaras. “I am deeply convinced that the new government under the leadership of Prime Minister Samaras will do what it takes to solve the problem in Greece.”

Spanish Prime Minister Mariano Rajoy will hold a working lunch with Merkel on Sept. 6 as the ECB governing council meets to work on the details of a mechanism to lower borrowing costs for peripheral euro members.

“Right now I don’t think anybody is going to be doing much of anything going into Jackson Hole,” said Kim of RBS. “September will hopefully bring a little more clarity on things.”

The euro gained 0.8 percent on the week, the biggest increase along with the Swiss franc and Norway’s kroner among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The U.S. dollar fell 0.8 percent and the yen added 0.4 percent. Canada’s dollar dropped 1.2 percent to lead decliners.

Net Shorts

Futures traders decreased their bets that the euro will decline against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show. 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 123,932 on Aug. 21, compared with net shorts of 137,810 a week earlier.

Australia’s dollar fell against 12 of its 16 major peers for the week as Reserve Bank Governor Glenn Stevens said the nation’s resource investment boom will peak “within the next year or two” and a report showed China’s manufacturing may contract at a faster pace.

“Australia’s dollar has really been underperforming today after weak Chinese data,” Eric Viloria, senior currency strategist at Gain Capital Group LLC in New York, said Aug. 23 in a telephone interview. “It’s looking a bit heavy here.”

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