Euro Extends Gains Amid Bets ECB Won’t Weaken Currency

The euro gained against the dollar on speculation that European Central Bank policy makers aren’t concerned a stronger currency will slow the economic recovery.

The 17-nation common currency advanced versus the majority of its 16 most-traded peers as the ECB’s balance sheet shrank to the smallest in almost a year on early loan repayments by euro-area banks even as French President Francois Hollande warned that a rising currency may deepen the recession. The yen touched the weakest in almost three years against the dollar as the Bank of Japan Governor Masaaki Shirakawa said he will step down on March 19, three weeks early. The ECB meets on Feb. 7.

“I think that the euro could continue to climb higher,” Douglas Borthwick, a managing director and head of foreign exchange at Chapdelaine FX in New York, said in a telephone interview. “The Japanese said ‘we are weakening our currency,’ the British are staring down the barrel of a downgrade and the U.S. is weakening the dollar through quantitative easing. The euro should be trading at the $1.40 level in the next few months.”

The euro strengthened 0.5 percent to $1.3583 at 5 p.m. in New York, lower than its five-year average of $1.3715. The yen slid 1.4 percent to 93.63 per dollar after touching 93.66, weakest since May 2010. The euro rose 1.9 percent to 127.18 yen after reaching 127.22, the highest since April 2010.

Peso, Ruble

Mexico’s peso rose 0.6 percent versus the dollar as Pacific Investment Management Co.’s Bill Gross called it a “great currency” in a Twitter post today. Gross, the Newport Beach, California-based founder of the world’s biggest bond-fund manager, cited the stability of Mexico’s target lending rate, which has been kept at a record low of 4.5 percent for 32 consecutive meeting’s by Mexico’s central bank.

The ruble gained 0.3 percent against the dollar as oil, Russia’s main export earner, advanced 0.5 percent in New York to $96.69 per barrel in New York.

The rand appreciated 1 percent after South Africa’s mineral resources minister said the government hasn’t decided whether to raise mining taxes and won’t nationalize mines. Metals and other commodities account for about 60 percent of South Africa’s exports, according to government data for 2012.

The euro extended gains after Luxembourg Finance Minister Luc Frieden said the currency’s level doesn’t concern him and its strength follows the economic reality of the euro zone.

Balance Sheet

“This reflects the fundamental data of the European economy and I highlight that a year ago we thought that the euro was incredibly weak,” Frieden said in an interview in Zurich.

Frieden’s comments contrast with the tone of France’s Hollande, who earlier told reporters at the European Parliament in Strasbourg, France, that the euro area has to use the currency as an export-promoting tool just like the U.S. and China. “We can’t let the euro fluctuate according to the mood of the market,” he said.

The central bank, which has held its main refinancing rate at 0.75 percent since July, will make no change at its next policy decision, according to all 58 economists surveyed by Bloomberg News.

“The ECB looks at this from a broader context -- the euro is trading close to average since the end of the crisis, there’s nothing terribly unusual,” Alan Ruskin, global head of Group of 10 foreign-exchange strategy at Deutsche Bank AG in New York, said in a telephone interview. “Some politicians are concerned about the extent of euro strength, that’s what you saw with Hollande’s comments today.”

Significant Shrinkage

The ECB’s balance sheet dropped 159.1 billion ($215.1 billion) to 2.77 trillion euros in the week ended Feb. 1, the Frankfurt-based central bank said in a statement. That’s the lowest level since Feb. 24 last year. ECB lending to banks declined 140.8 billion to 1.02 trillion.

Its balance sheet is declining just as the Federal Reserve and Bank of Japan expand theirs through further monetary stimulus. That’s pushing the euro higher, threatening to undermine European exports and a recovery from recession. The ECB meets Feb. 7.

“The ECB is the core major central bank with a shrinking balance sheet, and that removes the euro from funding-currency status,” Vassili Serebriakov, a foreign-exchange strategist at BNP Paribas SA in New York, said in a telephone interview. “The ECB balance-sheet shrinking is significant.”

The yen slid after Shirakawa told reporters in Tokyo that he would leave at the same time as two deputy governors on March 19, accelerating a leadership transition that may aid Prime Minister Shinzo Abe’s campaign for aggressive easing. He was scheduled to step down on April 8.

“The rise in euro-yen is more of a Japanese move,” Eric Viloria, senior currency strategist at Gain Capital Group LLC in New York, said in a telephone interview.

The yen has dropped 8.3 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro has gained 3.1 percent and the dollar lost 0.2 percent.

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