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Euro Rises Most in 6 Months on ECB Plan; Payrolls Weaken Dollar

The euro posted its biggest advance in six months versus the dollar after European Central Bank President Mario Draghi pledged to buy bonds to contain the region’s debt crisis.

The dollar weakened versus all 16 of its most-traded counterparts after a Labor Department report showing payrolls rose less than forecast added to speculation the Federal Reserve will undertake a third round of bond buying. The U.S. central bank meets Sept. 12-13. Canada’s dollar rallied to the strongest level in a year after employment grew. The Swiss franc fell the most since November versus the shared currency on reduced demand for safety.

“Draghi and payrolls were the two main events of the week and in both cases the strong conclusion that followed both outcomes was that the cavalry had come in,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “The Fed and ECB are saying they’re underwriting risk, so there’s no point in sitting on cash. Sell the dollar, buy risk.”

The 17-nation euro advanced 1.9 percent for the week to $1.2786, touching $1.2817 yesterday, the highest level since May 22. The gain is the largest since the five days ended Feb. 24. The shared currency had the largest weekly rise versus the yen since Aug. 17. It fetched 100.25, with a 1/7 percent gain, and reached 100.43, the most since July 4.

Weak Dollar

The yen rose 0.2 percent to 78.24 per dollar. It touched 78.02 the strongest since Aug. 1. South Africa’s rand was the biggest winner against the dollar, rising 2.8 percent, while Brazil’s real had the smallest gain versus the greenback at 0.1 percent.

Further euro gains may be limited as the 14-day relative strength index for the euro versus the dollar rose above the 70 level yesterday for the first time since May 2011. A reading above 70 signals an asset may have rallied too far too quickly and is due for a correction.

The dollar may gain to $1.2650 if the Fed doesn’t announce further monetary stimulus or sound “sufficiently dovish” at its meeting, said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York.

The euro has gained 1.9 percent in the past month among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen fell 1.3 percent, and the dollar declined 1.8 percent.

Forecast Level

At about $1.28, the euro is 5 percent above the $1.22 median year-end estimate of more than 50 analysts.

Futures traders raised bets that the shared currency will decline against the dollar for the first time in four weeks. Net-shorts rose by 745 to 102,306 in the week ended Sept. 4, according to data from the Commodity Futures Trading Commission compiled by Bloomberg. That compares with a record 214,418 reached June 5.

The Dollar Index fell 1.3 percent, touching 80.151, the lowest since May 11. The gauge, which tracks the greenback against six major trading partners is weighted 57.6 percent to the euro. The measure has weakened 7.5 percent since the U.S. central bank began buying debt in its quantitative easing program in December 2008 as such measures tend to debase the currency.

Yen Bets

Futures traders increased their bets that the yen will gain against the dollar. Net longs totaled 24,007 on Sept. 4, compared with 21,556 net longs a week earlier, according to CTFC data.

The Swiss franc had its biggest weekly decline against the euro since November on reduced haven demand. It touched 1.21550 yesterday, its weakest level since January.

The Swiss National Bank put a cap of 1.20 per euro on the franc in September 2011 to limit its strength after investors sought the currency as a refuge from the euro-area’s debt crisis.

ECB action will provide further support to euro as it removes “tail risk” of currency break-up, Axel Merk, founder and president of Merk Investments LLC in Palo Alto, California, wrote to clients Sept. 6. The policy actions put the euro on equal footing with other major currencies, he said.

Draghi said the ECB will target government bonds with maturities of one to three years, including longer-dated debt that has a residual maturity of that length. Purchases will be fully sterilized, meaning the overall impact on the money supply will be neutral, and the ECB will not have seniority, he said.

Price Swings

Implied volatility, which signals the expected pace of currency swings, for the currencies of Group of Seven nations fell to 8.04 percent yesterday, the lowest since October 2007, according to a JPMorgan Chase & Co. index. Lower volatility makes investments in currencies with higher benchmark lending rates more attractive because the risk in such trades is that market moves will erase profit.

Australia’s dollar rallied 0.6 percent against its U.S. counterpart, touching the highest level against the dollar in a month. Earlier it fell to a eight-week low after the central bank kept its overnight cash-rate target at 3.5 percent on Sept. 4 and the economy slowed last quarter.

Traders are pricing in about a 70 percent chance the RBA will lower the benchmark rate by a quarter percentage point to 3.25 percent at its meeting next month, swaps data compiled by Bloomberg show.

Canada’s currency had its biggest gain in four weeks versus the dollar after the nation added more jobs than projected, fueling expectations of a central bank interest-rate increase.

Canada’s currency gained 0.8 percent to 97.86 cents per U.S. dollar. It touched 97.66, the strongest in a year.

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