Euro Strengthens as Bundesbank Says Rates May Rise; Rupee Slumps

The euro rose to two-week high against the yen after Germany’s Bundesbank said the European Central Bank’s pledge to keep borrowing costs low doesn’t rule out higher interest rates to curb inflation.

The single currency advanced versus most of its 16 major counterparts as Germany’s central bank said in its monthly report that forward guidance “doesn’t rule out an increase in the benchmark rate if greater inflation pressure emerges.” The yen weakened for a second day against the dollar as Japan reported a trade deficit. India’s rupee slumped to a record as the nation’s stocks slid.

“The euro is trading higher on the back of those comments,” Brian Daingerfield, a Stamford, Connecticut-based currency strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit, said in a telephone interview. “It reintroduces the possibility that, should inflation pressures re-emerge, the ECB’s forward guidance could be replaced with something a bit less dovish.”

The euro rose 0.1 percent to 130.09 yen at 5 p.m. in New York after appreciating to 131.03 yen, the highest level since Aug. 5. The common currency rose 0.1 percent to $1.3335 after climbing to $1.34 on Aug. 8, the strongest since June 19. The yen weakened less than 0.1 percent to 97.55 per dollar.

Rupee, Lira

India’s rupee plunged to a record low versus the dollar on speculation a strengthening U.S. economy will prompt the Federal Reserve to pare its $85 billion of monthly bond purchases as soon as next month. The currency fell 2.4 percent to 63.13 per dollar after falling 2.6 percent to 63.23.

Overseas investors sold a net $3 billion of Indian stocks and bonds last month as the slowest growth in a decade made Asia’s third-largest economy vulnerable to a pullout of funds from emerging markets, spurred by speculation the Fed will reduce stimulus.

The Turkish lira declined to a record low against the euro as sovereign-bond yields climbed. The currency fell 0.6 percent to 2.6067 per euro after earlier sliding 0.8 percent to 2.6117. It decreased 0.6 percent to 1.9545 per dollar after touching 1.9563, its weakest level since July 12.

The currency is “vulnerable to risk sentiment in global markets” amid expectations that the central bank will leave rates unchanged at a monetary policy meeting tomorrow, Erkin Isik, fixed-income strategist at Turk Ekonomi Bankasi, said today in an e-mailed report.

Rand Slides

South Africa’s rand fell versus most its major counterparts as bond yields soared to the highest in 16 months on concern capital outflows from emerging markets will accelerate as the Fed considers a reduction in monetary stimulus. The currency slipped 1.1 percent to 10.2057 per dollar after reaching 10.2218, the weakest since July 8.

The Indonesian rupiah declined versus all but the rupee among its 31 most-traded peers after the country’s current-account deficit widened to a record last quarter. It slid 1 percent to 10,490 per dollar after touching 10,500, the lowest since June 2009.

ECB President Mario Draghi said in July for the first time that the central bank will keep interest rates at current levels or lower for an extended period of time. He reiterated his statement this month, trying to assure investors that the central bank won’t tighten policy too soon after it cut its benchmark rate to a record low of 0.5 percent in May.

‘Piling In’

“The comments from the German central bank are providing some support for the euro,” Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York, said in a telephone interview. “There seems to be a slightly more positive view on the euro. It seems like investors are gradually piling in.”

The euro has strengthened 5.3 percent this year, the best performer among 10 developed-nation currencies tracked by Bloomberg Correlation Weighted Indexes. The dollar rose 4 percent, while the yen slumped 8.8 percent.

A composite index based on surveys of purchasing managers will show services and manufacturing in the bloc expanded this month at the fastest pace in two years, according to a Bloomberg survey of analysts before Markit Economics releases the data on Aug. 22. The region emerged from its longest-ever recession in the second quarter, the European Union’s statistics office said Aug. 14.

Yen Falls

The yen weakened as the Ministry of Finance said Japan’s imports outpaced exports by 1.02 trillion yen ($10.4 billion) in July, compared with the median estimate for a 773.5 billion yen shortfall. It was the biggest deficit since January, when it was a record 1.63 trillion yen.

“Japan’s external balance remains deeply in deficit and that’s obviously a yen negative,” said Callum Henderson, Singapore-based global head of currency research at Standard Chartered Plc.

Trading in over-the-counter foreign-exchange options totaled $24 billion, compared with $18 billion on Aug. 16, according to data reported by U.S. banks to the Depository Trust Clearing Corp. and tracked by Bloomberg. Volume in options on the dollar-yen exchange rate totaled $3.1 billion, the largest share of trades at 13 percent. Options on the U.S. dollar-Chinese yuan amounted to just under $3.1 billion, or about 13 percent.

Dollar-yen options trading was 39 percent less than the average for the past five Mondays at a similar time in the day. Dollar-yuan options trading was 50 percent more than average.

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