Euro Rises Against Dollar as Spain’s Plan Bolsters Bailout View

The euro strengthened against the dollar after Spain announced its fifth austerity package, adding to speculation that it will meet the requirements for a European financial bailout to contain its debt crisis.

The dollar weakened against all of its 16 most-traded peers after claims for U.S. jobless benefits fell more than forecast amid increased demand for risker assets as stocks rose for the first time in six days and crude-oil futures increased. The 17-nation currency rallied, after reaching a two-week low, as Spain’s budget plan “responds to country-specific recommendations and goes even beyond them in some areas,” European Union Economic and Monetary Affairs Commissioner Olli Rehn said in e-mailed statement.

“The element which is seen now as a positive as it has increased the odds that Spain will get its bailout,” said Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in New York. “The market likes the story because it’s what it wants to hear.”

Europe’s shared currency gained 0.3 percent to $1.2913 at 5 p.m. New York time, after earlier touching $1.2829, its lowest level since Sept. 12. The euro advanced 0.1 percent to 100.20 yen. The yen added 0.2 percent to 77.61 per dollar.

The Standard & Poor’s 500 Index rose 1 percent, while crude oil futures gained 2.5 percent to $92.26 a barrel in New York.

Euro Trade

The euro has weakened 3.3 percent this year, the second worst performance after the yen among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar is down 2.9 percent.

The New Zealand dollar has led all major currencies this month against the greenback, appreciating 3.5 percent. The Brazilian real increased the least out of 16 counterparts versus the dollar, gaining less than 0.1 percent.

Swedish’s krona has appreciated more than all of its peers versus the dollar this quarter, gaining 6.1 percent. The Brazilian real is on pace for the biggest quarterly decline out of its peers, having slipped 1 percent.

The Brazilian currency has lost 8 percent versus the dollar in 2012, more than four times the decline of South Africa’s rand, the second-biggest loser. The Mexican peso leads all 16 of the dollar’s biggest peers with a gain of 8.6 percent this year.

Price Swings

Implied volatility, which signals the expected pace of currency swings, for the currencies of Group of Seven nations fell to 7.85 percent. The gauge reached 7.75 percent on Sept. 13, its lowest level 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.

The Australian dollar rebounded from a two-week low amid speculation China will act to support growth in the world’s biggest consumer of commodities.

The Aussie rose 0.7 percent to $1.0442. It touched $1.0329 yesterday, the weakest since Sept. 6.

New Zealand’s dollar increased versus the majority of its major peers as the country’s business confidence rose to a four-month high in September as record-low interest rates boosted spending and the housing market, according to a survey.

Kiwi Gains

The so-called kiwi advanced 0.9 percent to 83.15 U.S. cents.

The British pound increased as U.K. gross domestic product fell 0.4 percent in the second quarter, instead of the 0.5 percent decline estimated last month, the Office for National Statistics said.

The currency climbed 0.4 percent to $1.6235 and advanced 0.1 percent to 79.53 pence per euro, after appreciating to 79.24 pence, the strongest level since Sept. 6.

Spanish 10-year bonds advanced, snapping their biggest decline in almost two months, pushing 10-year yields down 12 basis points, or 0.12 percentage point, to 5.95 percent.

Prime Minister Mariano Rajoy’s Cabinet approved a new tax on lottery winnings and a cut in ministries’ spending to shrink the euro area’s third-biggest budget deficit. The 2013 target is 4.5 percent of gross domestic product compared with a 6.3 percent goal for this year. He’s risking a deeper recession while an unemployment rate of 25 percent stokes mounting protests.

’Clearer Signals’

“Investors may have been looking from some clearer signals that Spain is moving closer towards requesting a bailout,” Omer Esiner, chief market analyst in Washington at Commonwealth Foreign Exchange Inc., a currency brokerage. “But what we’re seeing does, to some extent, set the groundwork for an eventual request for aid by Spain.”

The euro could appreciate to $1.32 if the current bailout situations in Spain and Greece are rectified, Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York, said in an interview on Bloomberg Television’s “Lunch Money.”

The Dollar Index, which tracks the greenback against the currencies of six U.S. trading partners, lost 0.4 percent 79.551. It reached 78.601 on Sept. 14, the lowest level since February.

Applications for U.S. jobless benefits decreased 26,000 to 359,000 in the week ended Sept. 22, the lowest since July, Labor Department figures showed today. Economists forecast 375,000 claims, according to the median estimate in a Bloomberg survey.

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