Euro Climbs as Bank-Loan Repayments to Beat Forecast; Yen Drops

The euro rose to its strongest level against the dollar in 11 months as the European Central Bank said banks will hand back a greater amount of three-year loans than analysts estimated, boosting short-term borrowing costs.

The shared currency gained for a seventh week against the yen as the ECB said 278 banks will repay 137.2 billion euros ($184.4 billion) next week, versus an 84 billion-euro forecast in a Bloomberg survey. The yen dropped in a record weekly losing streak versus the dollar as Japan’s consumer prices fell. The two-year interest-rate swap spread between the euro and dollar, a key lending rate, increased to the widest in six months.

“The two-year swap rate driven by this big repayment has been correlated with the grind higher in euro,” Dan Dorrow, head of research in Stamford, Connecticut, at Faros Trading LLC, said in a telephone interview. “It’s a classic monetary interest-differential effect.”

The euro gained 0.7 percent to $1.3464 at 5 p.m. in New York and touched $1.3479, the strongest level since Feb. 29. It advanced 1.1 percent this week. Against the yen, the euro appreciated 1.2 percent to 122.32 and reached 122.77, the highest since April 11, 2011.

The difference between the rate on a two-year interest-rate swap denominated in euros and that in dollars increased to 24 basis points, the most since July, from 16 basis points yesterday. The euro rate was 0.42 percent, and the dollar rate was 0.66 percent.

The yen fell 7.45 percent in the past month, the biggest decline among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro gained 2.5 percent, and the dollar rose 0.1 percent.

Net Shorts

Futures traders decreased bets for a sixth straight week that the yen will decline against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the yen compared with those on a gain -- so-called net shorts -- was 64,068 on Jan. 22, compared with net shorts of 65,727 a week earlier.

Traders raised bets the euro will gain against the dollar, known as net longs, to 21,381, the most since July 2011, from 7,315 the week before, CFTC data show.

A gauge of currency volatility rose for a third day. JPMorgan Chase & Co.’s G7 Volatility Index, based on three-month options on Group of Seven nations’ currencies, touched 8.91 percent, after falling to a one-week low of 8.15 percent on Jan.

23. It rose to 9.19 percent on Jan. 18, the highest level since Aug. 2.

Lower volatility makes investments in currencies with higher benchmark interest rates more attractive as the risk in such trades is that market moves will erase profits.

ECB Loans

The ECB flooded financial markets a year ago with two tranches of Longer-Term Refinancing Operations totaling more than 1 trillion euros after banks stopped lending to each other due to the sovereign-debt crisis. Financial institutions have the option of repaying the loans, which were made at the average of the ECB’s benchmark rate over their duration, after a year.

“The repayment is much higher than the market expected, and it’s positive for the euro,” said Roberto Mialich, a senior currency strategist at UniCredit SpA in Milan. “Banks, which were part of the euro problem, are willing and able to make repayment to the ECB and this will provide further upward momentum.”

Pound Drops

Sterling fell against the euro after a report showed Britain’s economy shrank 0.3 percent in the fourth quarter. The pound lost 0.6 percent to 85.19 pence per euro and touched 85.37 pence, the weakest level since December 2011.

The euro may experience medium-term weakness versus the dollar and pound as it approaches key resistance levels, according to Bank of America Corp., citing technical analysis.

The shared currency may slide against the greenback if it fails to breach a zone from $1.3487 to $1.3603, MacNeil Curry, head of foreign-exchange and interest-rates technical strategy at Bank of America Merrill Lynch, wrote in a client note. It might reverse or pause versus sterling at the 85.33 to 85.93 pence-per-euro level, he said. Resistance is an area on a chart where sell orders may be clustered.

The yen fell as the government said consumer prices excluding fresh food fell 0.2 percent in December from a year earlier. The central bank announced open-ended asset purchases and a 2 percent inflation target this week.

The Japanese currency was down 0.6 percent to 90.91 per dollar after depreciating as much as 1 percent to 91.19, the weakest level since June 2010. It dropped for an 11th straight week, the longest losing streak in data compiled by Bloomberg going back to 1971.

Aussie Dollar

The Australian dollar rose versus the yen for a second day on speculation Japan’s consumer-price decline will add pressure on the Bank of Japan to expand stimulus. The currency gained 0.4 percent to 94.76 yen and touched 95.10, the highest since 2008.

The Aussie reached a three-week low versus the U.S. dollar as traders remained almost split on whether the Reserve Bank of Australia will cut its benchmark interest rate on Feb. 5. The currency touched $1.0403, falling below its 100-day moving average of $1.0417. It dropped yesterday below its 50-day moving average at $1.0473.

South Africa’s rand was the biggest winner among the greenback’s 16 most-traded peers as investors bet the currency fell too much, too quickly, yesterday as it reached an almost four-year low. The rand gained as much as 1.3 percent to 8.9325 per dollar, the biggest intraday jump since November. It fell to

9.0878 yesterday, the weakest level since April 2009.

Credit Suisse Group AG reduced its three-month forecast for the currency to 9.2 per U.S. dollar from 8.7, citing the risk of social and political instability from consolidation in the mining sector. Credit Suisse disclosed the revision in a research note today.