Euro Falls Most in 2 Months as Rally Overheats; Yen Snaps Losses

Euro Banknotes
The euro dropped 1.2 percent to $1.3589 this week in New York after reaching $1.3893 on Dec. 27, the strongest level since October 2011. Photographer: Chris Ratcliffe/Bloomberg

The euro fell the most against the dollar in two months amid speculation its six-month rally was due for a pause even as data signaled improvements in the European economy.

The yen snapped nine weeks of losses as Japanese Prime Minister Shinzo Abe said Jan. 1 the nation was halfway to escaping deflation. New Zealand’s dollar advanced against all 16 major counterparts on bets for an interest-rate increase. Federal Reserve Chairman Ben S. Bernanke said the U.S. is poised for faster growth before a Jan. 10 report forecast to show 195,000 jobs were added in December.

“The risk-off trading in foreign-exchange markets is completely at odds to robust economic indicators we have seen recently,” Eimear Daly, head of market analysis at Monex Europe Ltd. in London, said yesterday. “I expect next week to bring a return to fundamental currencies levels as traders return from extended holidays.”

The euro dropped 1.2 percent to $1.3589 this week in New York after reaching $1.3893 on Dec. 27, the strongest level since October 2011. The greenback fell 0.3 percent to 104.86 yen after rising to 105.44 on Jan. 2, the weakest level since October 2008. Japan’s currency climbed 0.6 percent to 142.48 per euro.

The Bloomberg Dollar Spot Index, which tracks the greenback against 10 major peers, rose 0.3 percent to 1,026.23, the third-straight weekly rally.

Winners, Losers

The New Zealand dollar’s 1.5 percent advance this week against the greenback was the most among 16 major currencies, followed by the dollars of Australia, up 0.9 percent, and Canada, up 0.7 percent. South Africa’s rand and Brazil’s real led decliners, dropping 2.1 percent and 1.6 percent.

The kiwi climbed for the first time in four weeks amid speculation the Reserve Bank of New Zealand will raise its benchmark interest rate at a Jan. 29 meeting. It traded at 82.73 U.S. cents.

“I would not rule out a rate hike, which most expect in March,” Marc Chandler, chief currency strategist at Brown Brothers Harriman & Co., said in a phone interview yesterday.

Sterling posted its first weekly decline in three weeks versus the U.S. currency as a survey of purchasing managers released Jan. 2 showed manufacturing unexpectedly fell, and data the next day showed construction output cooled in December.

The Bank of England may signal a lower unemployment threshold next week, Sam Hill, a strategist at RBC Capital Markets, wrote in a note. It’s “highly likely” that the jobs data release on Jan. 22 will be even closer to 7 percent, he said, from 7.4 percent.

The pound fell 0.4 percent to $1.6418.

‘Global Growth’

The common currency declined against all but three among major currencies this week even as euro-area factory output in expanded for a sixth month.

An index based on a survey of purchasing managers in the euro-area manufacturing industry increased in December to 52.7 from 51.6 the previous month, London-based Markit Economics said Jan. 2. In Spain, registered unemployment fell by 107,570 people in December, the country’s labor ministry said in Madrid. That was largest drop since June.

“The plethora of manufacturing PMI data points to strong near-term global growth in 2014 and certainly does not justify the underperformance of risk and the move into safe-haven currencies we have seen,” Monex Europe’s Daly said.

The European Central Bank is forecast by all 50 economists in a Bloomberg survey to hold its key interest rate steady when it meets Jan. 9. ECB President Mario Draghi kept the rate unchanged last month after surprising investors in November by cutting it to a record 0.25 percent.

‘Technical’ Drop

The euro, which welcomed 18th member Latvia this week, has gained 6.3 percent versus the greenback since July 10, when Bernanke said the economy still required very accommodative monetary stimulus.

“The drop in euro-dollar is mainly technical in nature,” Sebastien Galy, a New York-based senior foreign-exchange strategist at Societe Generale SA, said of this week’s move. “A phase of consolidation at such high levels is nothing unusual.”

Bernanke, in his final month as Fed chairman, said yesterday in a Philadelphia speech that the headwinds that have held back the U.S. economy may be abating.

“The combination of financial healing, greater balance in the housing market, less fiscal restraint, and, of course, continued monetary policy accommodation bodes well for U.S. economic growth in coming quarters,” he said.

Tapering Speculation

The Fed will release the minutes of its last policy meeting on Jan. 8. Officials said Dec. 18 they would trim monthly purchases of bonds to $75 billion from $85 billion starting this month as economic growth accelerated and take further “measured steps” depending on how the economy performs. It next meets Jan. 28-29.

Non-farm payrolls in the U.S. increased by 195,000 in December after rising by 203,000 the previous month, according to the median forecast of 61 economists surveyed by Bloomberg. The unemployment rate was unchanged at 7 percent, survey estimates of the Labor Department data showed.

“Our key focus on the minutes will be to discern whether meeting participants viewed the first tapering move as the beginning of a steady sequence of purchase reductions which should continue over the next several meetings, or whether they are leaning toward a more tentative approach,” Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York, said Jan. 3 in a report. “Our expectation is that QE tapering will continue.”

The common currency has rallied 8.4 percent in the past 12 months, the best performer of the 10 developed-nation currencies tracked by Bloomberg Correlation Weighted Indexes. The yen has weakened 16 percent, the biggest drop, while the U.S. dollar gained 3.6 percent.

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