Euro Rises to $1.30 on Speculation Contagion Will Be Contained

The euro strengthened to $1.30 for the first time in a week on optimism Cyprus is moving closer to a deal to stave off financial collapse and prevent contagion from infecting the rest of the region.

Europe’s shared currency climbed versus all of its 16 major peers as Cyprus’s House of Representatives approved measures as part an attempt to secure financial support. The pound pared a gain versus the dollar after Fitch Ratings said it may downgrade the U.K.’s AAA rating. Asian currencies fell for a fifth week, the longest losing streak since June, as the turmoil in Europe reduced demand for higher-returning assets.

“The euro’s bounce was mostly a result of optimism that we’ll see some kind of deal cobbled together by Cypress the European Union,” Omer Esiner, chief market analyst in Washington at the currency brokerage Commonwealth Foreign Exchange Inc., said in a telephone interview. “We’re very much in wait-and-see mode.”

The euro climbed 0.8 percent to $1.2989 at 5 p.m. New York time, after reaching $1.30 for the first time since March 15. The share currency touched $1.2844 on March 19, the weakest level since Nov. 22. It strengthened 0.3 percent to 122.73 yen, after dropping as much as 0.8 percent. The yen rose 0.5 percent to 94.46 per dollar.

Futures traders increased their bets that the euro will decline against the dollar, figures from the Commodity Futures Trading Commission show. The difference in the number of wagers by hedge funds and other large speculators on an decline in the euro compared with those on a drop -- so-called net shorts -- was 44,884 contracts on March 19, compared with net shorts of 24,787 a week earlier.

Fitch Warning

Britain came a step closer to losing its top credit grade at Fitch after Chancellor of the Exchequer George Osborne said debt will rise more than previously forecast. The U.K. was placed on rating watch negative, “indicating a heightened probability of a downgrade in the near term,” Fitch said in a statement.

The U.K. currency was 0.4 percent higher at $1.5230, after earlier strengthening to $1.5248. Sterling weakened 0.3 percent to 85.29 pence per euro.

Norway’s krone increased versus most of its major counterparts after the country proposed raising capital requirements at its banks to protect the economy from financial losses. The currency gained 0.6 percent to 5.8036 per dollar.

The Brazilian real fell for a second week versus the greenback after a report showed inflation slowed more than economists forecast, spurring speculation that the central bank will push back an increase in borrowing costs. The currency fell 1.3 percent on the week to 2.0094.

Emergency Proposal

European and Cypriot officials were locked in talks to find a formula to avert the Mediterranean island’s financial collapse, struggling to forge consensus on a bailout package before the European Central Bank cuts funding. The Cypriot House approved the capital controls and a plan to create an investment fund. The search for a compromise comes after a week of tumult marked by Cypriot lawmakers’ rejection of a proposal for an unprecedented tax on bank deposits.

Europe’s shared currency fell 0.7 percent versus the U.S. legal tender this week and 1.5 percent against Japan’s currency.

“People that tried to sell the euro earlier this week on the Cyprus news didn’t get much satisfaction,” Marc Chandler, New York-based global head of currency strategy at Brown Brothers Harriman & Co., said in a telephone interview. “This is some light position-squaring ahead of the weekend. The resiliency of the currency this week probably means we’ll get a bounce next week.”

ECB Repayments

Europe’s shared currency fell 1 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The yen weakened 0.5 percent, while the dollar rose 0.8 percent.

The 17-nation currency will now target the area from $1.3108 to $1.3135 after appreciating past so-called resistance at $1.2957 to $1.2976, Cilline Bain, a London-based technical analyst at Credit Suisse Group AG, wrote in a note to clients. Resistance refers to an area on a chart where sell orders may be clustered.

The European Central Bank said today that financial institutions will repay 1.94 billion euros of three-year loans on March 27, down from 6.82 billion euros the week before. That takes the total amount of money repaid early to 237.7 billion euros, or 23 percent of the overall lending.

‘Short-Term Relief’

The ECB flooded financial markets with three-year loans totaling more than 1 trillion euros a year ago after banks stopped lending to each other because of Europe’s debt crisis. Banks now have the option of repaying the loans, which were offered at the average of the ECB’s benchmark rate over their duration.

“The growth outlook remains just awful for Europe, so I fully expect the ECB to be easing within a month or two,” Richard Franulovich, chief currency strategist at Westpac Banking Corp. in New York, said in a Bloomberg radio interview. “Whatever short-term relief we might see, I fully expect the euro to be trading lower in coming days.”

The Bloomberg-JPMorgan Asia Dollar Index, which tracks the 10 most-active currencies in the region excluding the yen, dropped 0.13 percent since March 15.

Traders are paying the most since January 2012 for contracts granting them the right to buy the yen, relative to options for selling the currency. There is a 0.39 percent premium for yen calls, one-year 25-delta option risk reversal rates show. The market turned bullish on the yen on March 12 for the first time since June 19.

Before it's here, it's on the Bloomberg Terminal.