Euro Rallies Most in Week as Cyprus-Led Contagion Concern Fades

The euro gained the most this week versus the dollar as falling Spanish and Italian government bond yields signaled Cyprus’s banking crisis may be contained.

Japan’s currency strengthened as the Bank of Japan reiterated its monetary-stimulus options, damping speculation for additional novel measures to boost the economy. Europe’s common currency rose from a four-month low to the dollar as Cyprus’s banks opened, with rules curbing access to cash. Mexico’s peso has been the best performer against the dollar among its 16 major peers this month and this quarter.

“There’s definitely a little bit of a relief bounce going on related to Cyprus,” Brad Bechtel, managing director at Faros Trading LLC in Stamford, Connecticut, said in a telephone interview. “There’s a good amount of month-end related activity, as well. People are comfortable to stay a little short euro. They’re still skeptical that we’re going to get a bounce just yet, but they’re getting more concerned about it.”

The 17-nation euro rose 0.3 percent to $1.2816 at 5 p.m. New York time. It touched $1.2751 yesterday, the least since Nov. 21. The yen gained 0.3 percent to 94.15 per dollar. Japan’s currency was little changed at 120.67 per euro.

Peso Strength

Mexico’s peso has gained 3.4 percent to the greenback in the past month, while South Korea’s won has declined 2.7 percent. This quarter, the Mexican currency has rallied 4 percent and South Africa’s rand has depreciated 8 percent.

The rand today gained the most in two weeks as the nation’s trade deficit narrowed in February from a record in the previous month. South Africa’s currency rose 0.6 percent to 9.0292 per dollar.

The Australian dollar fell for a second day against Japan’s currency as Italy’s inability to form a government and Cyprus’s bailout damped demand for riskier assets. The so-called Aussie fell 0.6 percent to 98.02 yen.

The European Central Bank is scheduled to make its next policy announcement on April 4. The central bank has held its benchmark interest-rate at 0.75 percent since July.

The Central Bank of Cyprus’s capital controls will include a 300-euro ($384) daily limit on withdrawals and restrictions on transfers to accounts outside the country. Banks opened at midday. They will close at 6 p.m. local time, Yiangos Dimitriou, head of the central bank’s audit department, said yesterday in comments broadcast on state-run CyBC television.

European Bonds

Yields on Italian 10-year bonds fell two basis points, or 0.02 percentage point, to 4.8 percent, while similar maturity Spanish security yields declined two basis points to 5.1 percent.

The European Commission said in a statement the control on capital movements must remain “proportionate” and be lifted as soon as possible.

“Euro has come down quite a bit this week,” Robert Lynch, a New York-based currency strategist at HSBC Holdings Plc, said in a telephone interview. “That contagion element has been problematic for the euro in the past and had contributed to the euros’ weakness yesterday, and you don’t have that today. With the more stable backdrop, I think that’s probably contributing to euro’s performance today.”

The Federal Labor Agency said the number of people out of work in Germany increased a seasonally adjusted 13,000 to 2.94 million. Economists had predicted a decline of 2,000, according to the median of 24 estimates in a Bloomberg News survey.

Market Measure

The shared currency may decline to its lowest level in almost three years, according to Morgan Stanley’s Ian Stannard.

“What we’re now seeing, with regards to the continued levels of uncertainty that have been building in the market, is a case where the euro is going to remain under some pressure in the near-term,” Stannard, head of European currency strategy at Morgan Stanley, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Joe Brusuelas. “The euro is going to continue to remain under pressure over the coming year into next year.”

The euro has dropped 0.6 percent in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar has risen 2.9 percent, while the yen dropped 7.1 percent, the worst performer.

BOJ Governor Haruhiko Kuroda told parliament’s upper house today that policy makers need to lower yields on longer-maturity government bonds and that purchases of risk assets may also be needed. The comments echoed lower-house testimony on March 26, when Kuroda pledged to buy more government bonds to reach the BOJ’s inflation goal. The central bank will discuss policy on April 3-4.

“Kuroda’s been talking up more aggressive easing and stamping out deflation,” said Janu Chan, a Sydney-based economist at St. George Bank Ltd. “If the governor does what’s expected, we’ll probably see limited reaction. There’s probably more risk that the yen strengthens than weakens.”

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