Euro Rallies Before ECB; Dollar Drops to Record Against Aussie
April 06, 2011, 5:14 PM EDTBy Catarina Saraiva and John Detrixhe
April 6 (Bloomberg) -- The euro advanced to its highest level against the dollar in more than 14 months on speculation the European Central Bank will increase borrowing costs further after raising its target lending rate tomorrow.
The 17-nation currency remained higher after Portugal’s Prime Minister Jose Socrates said in a televised address that he has asked the European Union for financial assistance. The greenback dropped to a record against the Australian dollar and the lowest level versus the Canadian currency in more than three years on the view the Federal Reserve will trail other central banks in boosting interest rates.
“There’s just a single-minded focus in the currency market among euro traders, which is the ECB raising interest rates tomorrow,” said Kathy Lien, director of currency research with the online currency trader GFT Forex in New York. “A bailout of Portugal will not threaten the stability of the overall union and will not draw away from the fact that the ECB will still raise interest rates.”
The euro gained 0.8 percent to $1.4331 at 5 p.m. in New York, from $1.4223 yesterday, after touching $1.4349, the highest level since January 2010. The yen depreciated 0.7 percent to 85.49 versus the dollar, from 84.87, breaching 85 for the first time since September. The euro climbed 1.5 percent to 122.52 yen, from 120.70.
The Aussie climbed as much as 1.2 percent to $1.0451, the highest since the currency began trading freely in 1983. The Canadian dollar rose as much as 0.7 percent to 95.69 cents against the U.S. currency, the strongest since November 2007.
Yen Tumbles
The yen tumbled against all of its most-traded counterparts tracked by Bloomberg on bets the Bank of Japan will expand economic stimulus as the nation recovers from its worst earthquake on record. The New Zealand dollar was the biggest gainer among major currencies, rising for a 10th day versus the yen in the longest stretch of gains since 2005.
Japan’s target lending rate of zero to 0.1 percent encourages investors to use the yen to fund carry trades, in which investors buy higher-yielding assets with amounts borrowed where interest rates are low. New Zealand’s official cash rate is 2.50 percent.
The New Zealand dollar gained 2.2 percent to 66.65 yen after touching 66.72 yen, the highest level since May 2010. The kiwi rose 1.4 percent to 77.95 U.S. cents.
Euro Versus Dollar
The euro has gained 7.1 percent against the dollar this year in the best performance among the most-traded currencies. It has strengthened as economic growth in Germany and accelerating inflation boosted expectations that policy makers will raise interest rates even as nations including Portugal and Ireland struggle with debt.
Portugal’s Socrates informed the European Commission of the nation’s intention to ask for the activation of the financial support mechanisms, the EU said in a statement. He resigned last month after parliament rejected his deficit-cutting plan and is presiding over a caretaker government with limited power until June 5 elections.
“This was a complete consensus that this bailout was going to happen, whether it was this week, next week or next month,” said Jens Nordvig, a managing director of currency research at Nomura Holdings Inc. in New York. “The only thing that matters now is what kind of specific arrangement will be negotiated and what kind of message is politically acceptable for Portugal.”
ECB President Jean-Claude Trichet signaled on March 3 that policy makers may raise the main refinancing rate at their next meeting to curb accelerating inflation, which reached a two-year high of 2.6 percent last month.
Pimco’s View
An increase in ECB rates and a resulting stronger euro are the “last thing that Greece, Ireland or Portugal needs,” according to Pacific Investment Management Co., manager of the world’s biggest bond fund.
“The ECB does need to make policy for the euro zone as a whole, but perhaps it should consider combining a rate-hiking cycle for the core with greater realism in terms of the approach for the weakest peripheral countries,” Andrew Balls, head of European portfolio management at Pimco in London, said today in a statement on the company’s website.
The ECB will raise its target rate by a quarter-percentage point from a record low 1 percent tomorrow, according to all 57 economists in a Bloomberg News survey.
The yen slumped on speculation Japan will trail other developed nations in ending stimulus measures as it rebuilds after its biggest earthquake on record.
‘Off the Table’
“Even though the U.S. is slow, we can see when policy is going to be tightening,” said Jon Wetreich, a currency strategist at Brown Brothers Harriman & Co. in New York. “Japan? That’s kind of off the table. That’s driving the yen weaker against all the currencies.”
Japan’s central bank will keep its target rate on hold at its two-day meeting ending tomorrow, according to all 14 economists in a Bloomberg News survey.
The Fed will raise its zero to 0.25 percent target rate for overnight lending between banks in the first quarter of 2012, according to the median forecast of 60 economists in a separate Bloomberg News survey.
--With assistance from Alexandra Harris in New York. Editors: Dennis Fitzgerald, Greg Storey
To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; John Detrixhe in New York at jdetrixhe1@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
