Euro Redemption Comes as Fed Rate Bets Hasten Commodity Slide

  • Haven currencies euro, franc, yen benefit amid market turmoil
  • Dollar may be sold as market has priced in rate increase: CMC

The euro is finding redemption in a market spooked by concern the Federal Reserve’s first interest-rate increase since 2006 will fuel further declines in commodities and the currencies linked to their export.

Europe’s common currency is trading more than 3 percent higher than the $1.06 year-end level analysts had forecast as of Nov. 30, data compiled by Bloomberg show. It has climbed 3.8 percent this month, second only to the Swiss franc, as speculation the Fed will raise rates on Dec. 16 spurs investors to retreat from commodities, equities and low-rated bonds. The yen, also considered a haven, held a gain from last week that was the biggest in three months.

“One of the key issues for currencies this week is how much of a rate move is already priced into markets and where does it go from there,” said Michael McCarthy, chief markets strategist in Sydney at CMC Markets. “The convention is that we’ll see pressure on emerging markets, commodities and support for safe havens.” Some of those moves have already taken place, he said.

The euro bought $1.0963 as of 6:45 a.m. in London on Monday from $1.0986 on Friday, when it completed back-to-back weekly gains. It fetched 132.91 yen from 132.93. Japan’s currency was little changed at 121.22 per dollar, holding a 1.7 percent weekly advance. The franc was at 98.52 centimes per greenback after touching a six-week high on Dec. 11.

A sustained euro rally would wrong-foot analysts who are calling for the currency to drop to $1.05 by the end of March amid the European Central Bank’s bond buying program.

The Canadian and Australian dollars were last week’s worst performers among Group-of-10 currencies as oil dropped to the lowest level since 2008 and iron ore extended a decline that’s seen its value nearly halve this year. The Bloomberg Commodity Index tumbled to its weakest since 1999.

Citigroup Inc. advised clients to sell the Australian dollar versus Japan’s currency, targeting a level of 84.10 yen in one to two weeks, Todd Elmer, a Singapore-based currency strategist at the bank, wrote in a note Monday. The Aussie rose 0.3 percent to 87.24 yen.

Confidence in Japan’s economy among large manufacturers unexpectedly held up in the past few months, supporting a view that additional monetary stimulus won’t be imminent. The Tankan index of confidence among large manufacturers was unchanged at 12 in December, the Bank of Japan said Monday. Central bank Governor Haruhiko Kuroda is set to announce the BOJ’s latest policy decision on Dec. 18.

“There appears to be no major catalyst for Governor Kuroda to signal additional easing at the BOJ policy meeting later this week,” Elmer wrote. “Indeed, he may even stress steadiness in the corporate sector and such hawkishness could be taken as yen positive.”

Fed Move

Traders see a 74 percent probability the Fed will increase its benchmark from near zero by its meeting on Dec. 15-16, according to futures data compiled by Bloomberg. The calculation is based on the assumption the effective federal funds rate will average 0.375 percent after liftoff, compared with the current range of zero to 0.25 percent.

Despite those odds, hedge funds and other large speculators pared bullish bets on the dollar in the week through Dec. 8. Futures wagers on a stronger greenback against a basket of eight currencies fell to net 379,040 contracts from 417,129 the week before, according to Commodity Futures Trading Commission data.

“I suspect the market has run ahead of the Fed’s intended cycle and it’s more likely we’ll see selling of U.S. dollars and buying of euro and yen after the announcement,” said CMC’s McCarthy.

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