Euro Climbs as ECB Sees Recovery; Aussie Gains on China

The yen slid to the weakest level since July 2010 against the dollar after a Nikkei report quoted Japanese Prime Minister Shinzo Abe as saying the central bank should include maximum employment among its goals.

The yen has plunged since the election of Abe, who has pledged to increase monetary stimulus to weaken the currency and end deflation. The euro gained the most in five months versus the dollar after European Central Bank President Mario Draghi said the economy should gradually recover and Spain sold more than the target at its first debt auction of 2013, adding to signs the region’s fiscal crisis is easing. The Australian dollar rose for a fifth day as China’s imports increased.

“The more Abe opens his mouth, the more he seems to be encouraging views for additional monetary easing or actual devaluation of the yen itself,” Ravi Bharadwaj, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co., said in a phone interview. “Investors are just reciprocating by selling off the yen.”

The euro rose 1.6 percent to $1.3272 at 5:04 p.m. in New York, the most since Aug. 3. The shared currency advanced 2.6 percent to 117.73 yen, reaching the strongest level since June 8. The yen tumbled 1 percent to 88.78 per dollar, the weakest since July 14, 2010.

Yen Forecasts

Analysts at firms including Morgan Stanley, Societe Generale SA and Citibank Inc. lowered their yen forecasts. Morgan Stanley said in a report the currency may weaken to 100 yen to the dollar by the fourth quarter, versus an earlier estimate of 90. Societe Generale said the yen may depreciate to 97 by year-end. The firm previously projected 87 yen. Citibank said the currency may decline by the end of March to 90 to the dollar, from an earlier forecast of 87.

Morgan Stanley boosted its year-end euro forecast to $1.26, from $1.20 previously, and increased its estimate for the Australian dollar to $1.05, from 96 U.S. cents.

The Dollar Index, which Intercontinental Exchange Inc. uses to track the greenback against the currencies of six major U.S. trade partners, slid as much as 1.1 percent in the biggest intraday drop since September.

The cost for European banks to convert euro-denominated payment streams into dollars-based funding via the cross-currency swaps market decreased. The two-year cross-currency basis swap was 25 basis points, or 0.25 percentage point, from the euro interbank offered rate, the least since July 2011 on a closing basis. The gap was 35 basis points in November.

‘Real Turnaround’

“The two-year basis swap shows how U.S. and European banks look at each other in terms of credit,” Doug Borthwick, managing director and head of foreign exchange at Chapdelaine FX in New York, said in a telephone interview. “We’ve come back a lot from the stage of fear that the market had regarding Europe. It’s a real turnaround in sentiment.”

The ECB left its main refinancing rate at a record-low 0.75 percent at a meeting today in Frankfurt, as forecast in a Bloomberg News survey of economists.

Draghi said a “gradual recovery should start” later this year as ECB measures work their way through the economy. At the same time, it’s too early to claim success and risks to the outlook are on the “downside,” he said at a news conference following the rate decision.

“The market clearly went into the meeting looking for dovish undertones with the broader European economy still quite slack,” Mike Moran, a senior currency strategist at Standard Chartered Plc in New York, said of the ECB session in a telephone interview. “The market wasn’t really prepared for such an upbeat message.”

Spanish Bonds

The Spanish Treasury in Madrid raised 5.82 billion euros ($7.69 billion) from the sale of three bonds, exceeding its upper target of 5 billion euros.

Yields on benchmark Spanish 10-year government bonds dropped to a 10-month low, reaching 4.89 percent, the least since March. They climbed to as high as 7.75 percent in July.

The euro appreciated 1.4 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The yen tumbled 8.5 percent, and the dollar fell 0.8 percent.

Japan’s currency slid versus all of its 16 most-traded peers after Nikkei quoted Abe as saying in an interview that the next central-bank governor needs to play a role in achieving a 2 percent inflation target, double the current target.

A draft document obtained by Bloomberg News showed Japan’s government expects the central bank to conduct “bold” monetary easing. Bank of Japan Governor Masaaki Shirakawa, whose five-year term ends in April, said yesterday the BOJ was in close cooperation with the government. The bank meets Jan. 21-22.

Aussie Gains

Australia’s dollar climbed to the highest in almost four months versus its U.S. peer after data showed imports increased in China, the South Pacific nation’s biggest overseas market.

Shipments to China rose 6 percent last month, the customs administration said in Beijing. Economists surveyed by Bloomberg forecast a gain of 3.5 percent.

The Aussie rose 0.8 percent to $1.0598 and touched the strongest since Sept. 14. The currency gained 1.8 percent to 94.08 yen and reached the highest since August 2008.

The South African rand dropped to a four-week low as concern about labor unrest in mining and farming outweighed a boost for commodities. Fitch Ratings downgraded the country to BBB from BBB+, citing deterioration in its economic prospects.

The currency declined as much as 1.1 percent to 8.6858 per dollar, the weakest since Dec. 12.

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