Euro Rises After EU Leaders Renounce Spain Loan Seniority

The euro surged the most this year against the dollar after European leaders eased terms on loans to Spanish banks, taking a step toward resolving the region’s debt crisis and boosting demand for the shared currency.

The 17-nation euro posted its biggest gain in eight months versus the yen as European Union President Herman Van Rompuy said officials meeting in Brussels agreed to drop the condition that emergency loans to Spanish banks give creditor governments preferred status. The Australian and New Zealand dollars advanced as stock gains boosted demand for higher-yielding assets.

“The move that we saw today was a positive step by European leaders,” Joe Manimbo, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co., said in a telephone interview. “It’s not the best-case scenario, but it certainly exceeds the market’s really low expectations heading into the summit.”

The euro advanced 1.8 percent to $1.2667 at 5 p.m. New York time after rising as much as 2 percent, the biggest intraday gain since Oct. 27. The shared currency jumped 2.2 percent to 101.04 yen, gaining as much as 2.6 percent, the most since Oct. 31. The yen fell 0.4 percent to 79.79 per dollar.

Implied volatility among currencies fell, touching the lowest level since May 8, according to a JPMorgan Chase & Co. gauge. The JPMorgan Global FX Volatility Index declined to 9.56, up from this year’s low of 8.84 in April. The high was 12.37 in January and the average this year is 10.36.

Haven Assets

Even as the euro has outperformed the U.S. dollar on demand for higher-risk assets, the currency’s performance against other counterparts has been muted because the EU’s emergency-loan decision did barely enough to meet already-low expectations, Manimbo said.

The euro was little changed against nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes. Haven assets were the worst performers, with the greenback slumping 0.7 percent and the Japanese currency falling 1.3 percent. Canada’s dollar was the best performer with a 0.5 percent increase.

The euro was rose 0.1 percent against the New Zealand dollar and dropped 0.1 percent against the Swedish krona and Australian dollar. Hedge funds and other large speculators hold a net-short euro position, or bet that the currency will fall against the dollar, of 141,066 contracts, as of June 19. The speculative positioning reached a euro-era record-high June 5.

“I don’t think that what was announced is a big game changer at this point,” Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York, said in a telephone interview. “There’s still no bond-buying framework in place. There’s still a structural problem that hasn’t been addressed yet.”

Quarterly Drop

The euro is still set for its biggest quarterly drop against the dollar and the yen since September. The euro has weakened 8.6 percent versus the yen since March 31, and 5.1 percent against the dollar.

The euro may face resistance at its June 18 high of $1.2748, according to data compiled by Bloomberg based on trading patterns. Resistance refers to an area on a price graph where sell orders may be clustered. The stronger the resistance, the more buying is needed to rise through that level.

The yen fell versus all of its major counterparts as rising U.S. Treasury yields draw more funds into dollar-based securities, helping weaken Japan’s currency. Treasury two-year notes yield about 19 basis points, or 0.19 percentage point, more than Japanese bonds of similar maturity. The spread has widened from 13 basis points in September.

Dollar Index

The market’s risk-on tone has reversed recent safe-haven flows, Eric Theoret, a currency strategist in Toronto at Bank of Nova Scotia’s Scotia Capital unit, wrote today in a note to clients. Bank of Japan policy, domestic fundamentals and a growing global risk appetite should push the U.S. dollar to 83 yen, according to Theoret.

The Dollar Index fell as much as 1.7 percent, the most since Oct. 27, ending a two-day rally as the EU’s Spanish bond decision decreased investor appetite for risk-averse assets. The index is used by IntercontinentalExchange Inc. to track the greenback against the currencies of six U.S. trading partners.

The dollar has weakened against nine of its 16 most-traded counterparts this year, with the Mexican peso’s 4.3 percent rise leading gainers. The euro dropped 2.3 percent versus the dollar and the yen fell 3.6 percent, the biggest decline after the Brazilian real’s 7.1 percent plunge.

Spain, Italy

Spain’s 10-year bond yield dropped 61 basis points to 6.33 percent, the biggest decline since Dec. 5. Italy’s 10-year yield slid 38 basis points to 5.82 percent.

EU leaders gathered today for a second day of talks to discuss measures to stem a debt crisis that’s spurred five euro members to seek international bailouts. Euro-bloc finance ministers will enact today’s deal on loans to Spanish banks at a meeting on July 9, Rompuy said, calling the accord a “breakthrough.”

The European Union has “addressed the issues on the seniority of Spanish loans,” said Roy Teo, a currency strategist in Singapore at ABN Amro Private Bank. “The fact that right now they are renouncing the seniority status means private bondholders will have similar, equal, weighting. It’s positive for the euro.”

‘Raising Funds’

South Africa’s rand rose against all but one of its major counterparts, rallying the most in more than nine months as stocks and commodities surged after the decision to support Spain’s banks boosted demand for riskier assets. The currency gained 2.8 percent to 8.1642 per dollar after rising as much as 3.4 percent, its biggest increase since Sept. 27.

Canada’s dollar also advanced the most since Nov. 30 versus the dollar as rising stocks and commodities increased demand for higher yielding assets. The so-called loonie appreciated 1.6 percent to C$1.0166.

The Australian dollar appreciated 1.9 percent to $1.0238 and gained 1.7 percent for the week. New Zealand’s dollar rose 1.7 percent to 80.13 U.S. cents.

“Anything that looks to be supportive of Spain and Italy in raising funds is going to be positive,” said Sacha Tihanyi, a strategist in Hong Kong at Scotiabank, a unit of Bank of Nova Scotia. “As long as these headlines continue to come out with this sort of flavor, we can see the Aussie and kiwi get squeezed a bit higher.”