Euro Rallies on Optimism Region’s Economic Growth Will Improve

The euro rallied for the sixth time in seven weeks on optimism the region’s economy will continue to rebound from contractions in 2012 and 2013 following the financial crisis.

The 17-nation currency gained as the current-account surplus widened to 21.8 billion euros ($30 billion) in October, the highest since 1997, while a report on Jan. 2 is forecast to confirm that euro-area factory output grew at a 31-month high in December. Brazil’s real surged as traders speculated central-bank intervention will prevent it from falling further after tumbling 2.4 percent the previous week. Turkey’s lira fell to a record amid concern a showdown between the government of Prime Minister Recep Tayyip Erdogan and the judiciary will worsen.

“Europe is running a large trade surplus -- the moves could be also reflective of that,” Vassili Serebriakov, a foreign-exchange strategist at BNP Paribas SA in New York, said in a phone interview. “Late-in-the-year balance-sheet adjustments related to trade flows” also bolstered the currency, he said, adding “the euro is overvalued at these levels.”

The euro climbed 0.6 percent to $1.3749 this week in New York, and reached 1.3893, the highest since October 2011. The euro rallied 1.6 percent to 144.59 yen, a seventh straight week of gains, while the Japanese currency fell 1 percent to 105.17 per dollar, its ninth weekly drop, the longest streak since February.

Dollar Measure

The Bloomberg Dollar Spot Index, which tracks the U.S. currency against 10 major counterparts, rose 0.2 percent to 1,023.22. The measure is up 3.7 percent this year.

JPMorgan Chase & Co.’s volatility index for the currencies of the Group of Seven nations reached 8.59 percentage points, the highest level since Dec. 13.

The Swiss franc’s 1.7 percent gain against the greenback led its 16 major peers in December, while South Africa’s rand declined 3.4 percent, the biggest loser.

The currency of Africa’s largest economy was also the worst performer in 2013, having lost 19.5 percent. Japan’s currency has weakened 17.5 percent, the second-worst performance. The euro and Danish krone were the biggest winners, having rallied 4.2 percent.

The yen was the worst performer in the fourth quarter, dropping 6.5 percent, while the 1.9 percent advance of South Korea’s won led the rest.

Expanded Majors

Among the 31 most-traded currencies tracked by Bloomberg, the Israeli shekel has gained the most versus the dollar this year at 7.1 percent. The Argentine peso lost the most at 24.3 percent.

The real was the best performer among major currencies this week after the central bank said Dec. 18 it will extend its intervention announced in August to support the currency and limit import price increases. Brazil will auction $200 million of foreign-exchange swaps on trading days from January through at least the end of June, down from offerings of $500 million four days a week this year.

“What has supported the real is the outlook that the central bank will continue to act aggressively,” Vladimir Caramaschi, the chief strategist at Credit Agricole Brasil in Sao Paulo, said in a phone interview.

The currency surged 2.1 percent to 2.3383 per dollar this week, the biggest five-day advance in three months.

Turkey’s Turmoil

The lira tumbled for a fifth week amid a showdown between the government and judicial powers.

Turkish markets are being roiled by a corruption probe that ensnared Erdogan’s cabinet and led to three ministerial resignations and the dismissal of some 500 police chiefs. Istanbul Prosecutor Muammer Akkas wrote in a statement yesterday that he’d been pulled off an investigation into businessmen and officials for involvement in bribery, rigging tenders and fraud.

“There’s zero predictability,” Cuneyt Paksoy, an investment committee member at Rhea Portfolio Management in Istanbul, said yesterday by phone. “The market is questioning the anchor of political stability, which was the key driver for Turkey’s lift to investment grade.”

Turkey’s currency slumped 3 percent from the end of last week to 2.1549 per dollar after dropping to an all-time low 2.1764.

The euro rallied yesterday after European Central Bank Governing Council member Jens Weidmann said keeping interest rates low may endanger political reforms.

German Outlook

“We must take care to raise interest rates again in a timely manner should inflation pressures build,” Weidmann, president of the Germany’s Bundesbank, said according to the Bild newspaper. “The euro area is recovering only gradually from the most severe economic crisis in the postwar period; pricing risks are slight. That justifies low benchmark rates.”

The ECB cut its policy rate target to a record low 0.25 percent in November. The region’s economy is forecast to contract 0.4 percent this year after a 0.7 percent decline in 2012.

The dollar was little changed this week amid speculation the Federal Reserve is still a long way from raising interest rates even after starting to reduce asset purchases that have debased the currency.

“The Fed did decide to taper, but the amount was minimal and we have yet to see what the policy outlook will be going forward,” said Marito Ueda, senior managing director at currency-margin company FX Prime Corp. in Tokyo. “Some bets on dollar gains are being unwound into year-end. The dollar is being sold across the board.”

The Fed said last week it will cut monthly asset purchases in January to $75 billion from $85 billion. Policy makers will reduce bond purchases in $10 billion increments over the next seven meetings before ending the program in December 2014, economists said in a Bloomberg survey published Dec. 19.

The dollar has advanced 4 percent this year among 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro has appreciated 8.8 percent, while the yen tumbled 16.1 percent.

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