Euro Advances for Second Day on Europe Speculation; Rand Slides

Euro Strengthens for Second Day Amid Spanish Bailout Speculation
The euro strengthened 0.3 percent to $1.2964 at 10:10 a.m. London time after falling to $1.2826 yesterday, the weakest level since Oct. 1. Photographer: Kiyoshi Ota/Bloomberg

The euro gained for a second day versus the dollar and the yen amid speculation Spain is moving closer to requesting a sovereign bailout and unlocking a European Central Bank program to curb the region’s debt crisis.

The 17-nation currency pared its advance after Reuters reported that the European Stability Mechanism lacks the cash to bail out Spain if the country asks for help before the end of the year. However, guidelines obtained by Bloomberg News last month showed the fund has the authority to raise cash by selling fixed-income securities. South Africa’s rand slid against all of its 16 most-traded peers after Standard & Poor’s cut the nation’s credit rating.

“Any bids you see in the price of euro-dollar are reflective of” optimism that Spain will request aid, Stephen Gallo, foreign-exchange strategist at Credit Agricole SA in London, said in a telephone interview. “No one wants to push the button extremely aggressively because we don’t know exactly when Spain will request a bailout, how long it will take.”

The euro gained as much as 0.5 percent to $1.2992 before trading at $1.2951 at 5 p.m. New York time, up 0.2 percent. It lost 0.7 percent on the week. The euro rose 0.3 percent to 101.61 yen, paring a 0.9 percent weekly decline, after briefly exceeding its 200-day moving average for the first time in three days. The Japanese currency slipped 0.1 percent to 78.44 yen to the dollar.

U.S. stocks erased gains, with the S&P 500 Index declining 0.3 percent after rising earlier as much as 0.4 percent.

Rescue Fund

Reuters’s IFR unit reported that the ESM, Europe’s permanent rescue fund, is prohibited by its rules from lending out paid-in capital. Citing unnamed banking sources, IFR reported the ESM isn’t planning to tap markets before January.

Draft guidelines obtained by Bloomberg show that the ESM will be able to sell a range of bills, bonds and money-market instruments to raise funds in financial markets.

A measure of volatility among major currencies was at almost a five-year low. JPMorgan Chase & Co.’s index of implied volatility among Group of Seven currencies fell to 7.55 percent. The gauge, based on three-month options, signals the expected pace of price swings. The five-year average is 12.4 percent.

South Africa’s currency snapped a three-day winning streak after S&P cut the nation’s credit rating one step to BBB with a negative outlook as a wave of strikes in the mining industry cause political uncertainty and social tensions put pressure on government spending.

The rand sank 0.8 percent to 8.7295 per dollar after climbing earlier to 8.5774, the strongest level since Oct. 5.

Aussie Drops

Australia’s dollar slid against all of its most-traded peers except the rand as commodities sank. S&P’s GSCI gauge of raw materials dropped 1 percent. The Aussie depreciated 0.3 percent to $1.0233, falling for the first day this week.

The euro has strengthened 0.6 percent against the greenback since S&P cut Spain’s sovereign-debt rating on Oct. 10 to BBB-, one step above junk. The move fueled speculation the nation would be pressured into seeking a bailout.

Spain’s 10-year bond rose for a third day, pushing its yield down 14 basis points, or 0.14 percentage point, to 5.63 percent. It dropped from the euro-era record of 7.75 percent reached in July to as low as 5.55 percent after ECB President Mario Draghi said the central bank is ready to do “whatever it takes” to preserve the euro.

Spanish Decision

While the ECB announced an unlimited bond-purchase program on Sept. 6 to stem financial turmoil, Spanish Prime Minister Mariano Rajoy has held off on deciding whether to request aid, a condition the bank insists on. European Union leaders will meet in a two-day summit in Brussels next week.

“There is some buying of the euro as investors speculated the S&P downgrade may hasten Spain’s request for a bailout,” said Noriaki Murao, New York-based managing director of the marketing group at the Bank of Tokyo-Mitsubishi UFJ Ltd., a unit of Japan’s biggest financial group by market value. “The markets will be watching if any progress is made at the EU summit.”

The shared currency will strengthen to $1.35 in the next three to six months, with the dollar weakened by the Federal Reserve’s third round of asset purchases under the quantitative-easing stimulus strategy, which may debase the currency, according to Danske Bank A/S. The U.S. central bank said last month it will buy $40 billion of mortgage debt a month until the economic recovery is well-established.

Unwinding Shorts

“We expect the unwinding of short euro positions to continue, and we also expect the Fed’s open-ended easing program to support euro-dollar going forward,” Morten Helt, a senior analyst based in Copenhagen, wrote in a report. “We still like to buy euro-dollar on dips.” A short position is a bet that a currency or security will fall.

The dollar remained lower against the euro after U.S. consumer confidence unexpectedly climbed. The Thomson Reuters/University of Michigan preliminary October consumer sentiment index increased to 83.1, from 78.3 the prior month. The U.S. confidence gauge was projected to decline to 78, according to the median forecast in a Bloomberg News survey.

Singapore’s currency climbed against all of its 16 most-traded counterparts after the city-state’s central bank unexpectedly announced that it would leave monetary policy unchanged, as inflation risks trump worries over a shrinking economy.

‘Appropriate’ Stance

“This policy stance is assessed to be appropriate in containing inflationary pressures and keeping the economy on a path of restructuring toward sustainable growth,” the Monetary Authority of Singapore said today in a statement following its semi-annual exchange-rate review.

There will be no change to the slope and width of the local currency’s trading band that the MAS uses as its main policy tool, the bank said. The level at which it is centered will also remain unchanged, the MAS said.

The Singapore dollar strengthened 0.5 percent to S$1.2222 versus its U.S. counterpart. It has advanced 6.2 percent this year, the best performance after the Mexican peso among the greenback’s major peers.

The peso gained 0.4 percent today to 12.8682 to the U.S. dollar.

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