Euro Rallies to Highest Since 2011 as ECB Balance Sheet Shrinks

The euro touched the highest level against the dollar in 14 months as the European Central Bank’s balance sheet contracted while the Federal Reserve said it would continue pumping money into the U.S. economy.

The 17-nation currency gained for a second week, its first back-to-back advance this year, amid data that showed Europe’s economy may be improving. The yen fell versus the dollar for a 12th straight week, the longest since at least 1971, amid bets Prime Minister Shinzo Abe will pick a new central-bank governor who will boost monetary stimulus. South Korea’s won slid versus all of its major peers. The ECB meets Feb. 7 on interest rates.

“The move in euro has been very dramatic,” Sireen Harajli, a foreign-exchange strategist in New York at Credit Agricole SA, said in a telephone interview. “The data in general have been coming up pretty fair in Europe. I think they’re indicating the economy in Europe right now at least is stabilizing.”

The shared currency rallied 1.3 percent to $1.3640 this week in New York. It touched $1.3711, the strongest level since Nov. 14, 2011. Against the yen, the euro climbed 3.6 percent, the most since February 2012, to 126.66 and touched 126.97, the highest since April 2010.

The dollar reached 92.97 yen, the highest since May 2010, and gained 2.1 percent on the week to 92.77 yen. It has never before risen for 12 straight weeks versus the Japanese currency, according to records compiled by Bloomberg dating to 1971.

Sixth Month

The euro appreciated in January for a sixth month against both the dollar and the yen. The advance against the greenback was the longest since May 2003, and the winning streak versus the Japanese currency was the longest since the euro began trading in 1999.

“There seems to be no reason to pick a top to the euro’s strength,” Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York, said Jan. 28 in an interview on Bloomberg Radio’s “Surveillance” with Tom Keene and Michael McKee.

The shared currency gained 4.8 percent over the past three months among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen tumbled 16 percent, the biggest decline, and the dollar lost 1.1 percent.

The yen tumbled this week as Abe faced a decision on who will replace BOJ Governor Masaaki Shirakawa, whose term ends in April. Abe has pushed for action to spur economic growth and fight deflation.

The South Korean won had its biggest weekly loss against the dollar since May amid concern a weak Japanese currency will hurt the nation’s exports. The won slid 2.1 percent to 1,097.38 to the greenback.

Real, Krona

Brazil’s real and Sweden’s krona were the biggest winners among the U.S. currency’s 16 most-traded counterparts.

The real gained as the central bank offered dollars to support it. The currency pared the advance yesterday after a government official said in an interview the central bank will avert excessive appreciation. The real gained 2.1 percent to 1.988 per dollar, the biggest weekly jump since Dec. 7.

The krona advanced 2.4 percent to 6.3087 per dollar and touched 6.2785, the strongest since August 2011. It added 0.4 percent to 8.6058 to the euro.

The European currency gained yesterday versus the dollar and yen as a gauge of manufacturing in the 17-nation region in January rose to the highest in almost a year. The purchasing-manager index increased to 47.9, the most since February 2012, London-based Markit Economics said. It has been below the 50 level that signals contraction for 18 months.

Balance Sheet

The ECB’s balance sheet fell to 2.93 trillion euros ($4 trillion) in the week ended Jan. 25, the lowest since February 2012. The central bank hasn’t purchased sovereign debt for 45 straight weeks.

Banks repaid 137.2 billion euros of emergency three-year loans to the ECB this week, the Frankfurt-based central bank said in a statement Jan. 31. Another 3.5 billion euros are expected to be returned next week, it said.

The ECB won’t increase its 0.75 percent benchmark interest rate at its meeting next week, a Bloomberg survey forecast.

The euro climbed yesterday as a strengthening U.S. jobs market and bets that the Federal Reserve will sustain stimulus to ensure the recovery boosted investors’ risk appetite.

Payrolls in the U.S. rose by 157,000 jobs in January, versus a Bloomberg survey’s forecast of a gain of 165,000, Labor Department figures showed. The unemployment rate unexpectedly rose to 7.9 percent, from 7.8 percent.

‘Sweet Spot’

“The jobs report hit the sweet spot of not being too strong and not being too weak,” Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York, said in a telephone interview. “It was strong enough to diminish some of the downside worries, but it wasn’t so strong that you had a situation where you’d be concerned about the Federal Reserve accelerating any shift in its monetary-policy approach.”

The Fed said Jan. 30 after a two-day policy meeting that it will keep purchasing $85 billion of Treasury and mortgage securities each month to spur the economy. The purchases will continue “if the outlook for the labor market does not improve substantially,” policy makers said

The central bank left unchanged its statement that its target interest rate will stay close to zero as long as unemployment remains above 6.5 percent and projected inflation stays below 2.5 percent.

“As long as it’s not 6.5 percent, Bernanke has to continue being a dove,” Doug Borthwick, a managing director and head of foreign exchange at Chapdelaine FX in New York, said yesterday in a telephone interview.

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