Euro Strengthens Amid Spanish Bailout Speculation; Dollar Falls

The euro gained against the dollar and yen after Italian and Spanish leaders agreed to keep working to stabilize regional financial markets.

The 17-nation currency was buoyed earlier amid speculation Spanish and European Union officials were working on plans to trigger European Central Bank bond purchases to boost Spain’s economy. The Dollar Index declined after Atlanta Federal Reserve Bank President Dennis Lockhart said the central bank may undertake further monetary stimulus. Canada’s dollar rallied amid gains in stocks and crude oil, the nation’s largest export.

“We expect Spain to come request aid at some point, but it will just take a while,” said Mary Nicola, a New York-based currency strategist at BNP Paribas SA. “We see there is further downside to go on the dollar. You had a slew of Fed speakers reiterating the policy that they put in place.”

The common European currency added 0.1 percent to $1.2980 at 5 p.m. New York time, and fell 1.1 percent this week. The shared currency was little changed at 101.46 yen. Japan’s currency was rose 0.1 percent to 78.17 per dollar.

The shared currency has fallen 0.8 percent in the past week versus nine developed-nation currencies tracked by the Bloomberg Correlation-Weighted Indexes. The dollar has gained 0.5 percent and the yen has advanced 0.8 percent.

Less Stress

Stress in the European financial markets is easing, reaching the least since July 2007, according to Bloomberg’s Euro Area Financial Conditions Index. The index rose to zero this week for the first time since 2007 after averaging minus 2.8 during the past year.

“Euro-dollar has served as a barometer for how confident investors are in Spain putting its finances on a better path,” said Joe Manimbo, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co. “The euro’s gain means that investors are less fearful for Spain’s immediate future.”

European governments “need to proceed toward a full accomplishment of economic and monetary union and create conditions for growth and the creation of jobs,” according to a statement from Italian Prime Minister Mario Monti’s office following a meeting with his Spanish counterpart Mariano Rajoy in Rome today.

The Dollar Index was little changed at 79.387, after falling as much as 0.5 percent. The greenback declined against higher-yielding counterparts after Lockhart, who votes on monetary policy this year, said in a speech in Atlanta that the central bank may act beyond its plan to buy mortgage-backed securities if the labor market doesn’t show signs of greater strength.

Monetary Stimulus

Fed Chairman Ben Bernanke said Sept. 13 the U.S. central bank will keep adding stimulus to the economy. The Fed announced it will buy $40 billion of mortgage bonds a month to pump money into the economy and boost employment.

The highest yield premium for China’s bonds over U.S. debt in five months will add to pressure for appreciation in the yuan. One-year notes yielded 273 basis points more than Treasuries yesterday, the most since April, after the spread widened 64 basis points this quarter.

The yuan breached 6.3 per dollar yesterday, a level policy makers had been defending all this year. The fixing has been kept weaker than 6.3 since May 11 and was 6.3426 per dollar today.

Canada’s currency was little changed at 97.64 cents per dollar, after gaining as much as 0.4 percent.

The nation’s consumer price index rose 1.2 percent in August from a year ago, compared with a 1.3 percent gain the prior month, Statistics Canada said today from Ottawa. The core rate, which excludes eight volatile products, increased 1.6 percent after a July gain of 1.7 percent. Economists surveyed by Bloomberg forecast that the total rate would stay at 1.3 percent and core inflation would be 1.5 percent.

Bank of Canada Governor Mark Carney said earlier this month he may raise interest rates as the economy moves to full output next year, and that inflation would return to its 2 percent target during the next 12 months.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE