Bloomberg News

Euro Rises Most Since January as Officials Increase Greece Aid

June 04, 2011

June 4 (Bloomberg) -- The euro gained the most against the dollar in four months this week after Greece was given more assistance to address its debt crisis, boosting confidence the region’s nations will be able to meet their obligations.

Europe’s shared currency reached a four-week high yesterday after Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said they agreed to pay the next installment to Greece under last year’s 110 billion-euro ($161 billion) bailout. The U.S. currency dropped to a record against the Swiss franc after the jobless rate unexpectedly rose to 9.1 percent. European Central Bank policy makers may consider increasing interest rates when they meet next week.

“People are taking the package as a positive factor,” said David Mann, regional head of research for the Americas at Standard Chartered Plc in New York. “Combined with the relative performance of the data out of the U.S. versus Europe, that has been a positive for now for the euro.”

The euro rose 2.2 percent to $1.4635, from $1.4319 May 27, and touched $1.4643, the highest level since May 5. It was the currency’s biggest weekly gain since Jan. 14. It added 1.6 percent to 117.48 yen, from 115.67 last week. The dollar dropped 0.6 percent to 80.34 yen, from 80.80.

Peer Gains

The euro was the biggest weekly winner against nine other currencies of developed nations measured by the Bloomberg Correlation-Weighted Indexes. It rose 1.6 percent, followed by a 1.2 percent gain in the Swiss franc and a 1.1 percent advance in the Norwegian krone.

European Union and International Monetary Fund officials agreed to pay the next installment to Greece under last year’s bailout, paving the way for an upgraded aid package that includes a “voluntary” role for investors. Greece’s government said a review of the country’s economic progress concluded “positively.”

“I expect the euro-group to agree to additional financing to be provided to Greece under strict conditionality,” Luxembourg’s Juncker said after meeting with Greek Prime Minister George Papandreou in Luxembourg yesterday.

‘Bit of Optimism’

“There’s a little bit of optimism on the sovereign debt stuff,” said Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York. “You’ve seen Treasury yields coming down very steadily since the peak in early April. They have continued sliding through the second half of May and that’s helped contribute to the euro’s rise.”

Yields on the Treasury 10-year notes fell to less than 3 percent on June 1 for the first time in 2011.

The dollar fell against 12 of its 16 most-traded counterparts this week after manufacturing, unemployment and consumer confidence were weaker than forecast, bolstering the case for the Federal Reserve to keep interest rates at record lows.

The Institute for Supply Management’s factory index fell to 53.5 in May from 60.4 the prior month, the Tempe, Arizona-based group said June 1. The jobless rate climbed to the highest level this year from 9 percent a month earlier. Consumer confidence dropped to a six-month low of 60.8.

Moody’s Investors Service said June 2 it may place the U.S. government’s rating under review for possible downgrade based on progress by Congress and the Obama administration on increasing the statutory debt limit in coming weeks.

Annual Pace

The dollar has dropped 6.5 percent this year against its nine developed-nation counterparts, the biggest decline in the group, according to BCWI. The euro has gained 3.2 percent this year and the yen has dropped 5.5 percent.

The Fed has kept its benchmark interest rate at a record low of zero to 0.25 percent since December 2008. Futures contracts show the likelihood of an increase in the fed funds target by the central bank’s March 2012 meeting fell to 23 percent today, from 26 percent yesterday. The Federal Open Market Committee meets June 22.

The ECB raised its rate by 25 basis points in April and may increase rates again when it meets in July, a Bloomberg survey showed. The central bank will leave its rate unchanged at 1.25 percent at its meeting June 9, a separate survey showed.

South Africa’s rand gained the most against the dollar among the major currencies this week. Gold, which the nation exports, rose 0.3 percent.

The rand increased 3.1 percent to 6.7137 per dollar, from 6.9290 May 27.

Futures Data

Bets the dollar will drop against the euro, yen, pound, Australian dollar Canadian dollar and Swiss franc rose to 126,029 as of May 31, according to Commodity Futures Trading Commission data. Dollar shorts, or bets the dollar will fall, reached 287,756 in March, the highest since the euro’s inception, according to data compiled by Bloomberg.

The Swiss franc reached a record 83.31 centimes against the dollar yesterday and 1.20543 against the euro on June 2.

“It’s a pretty nasty witch’s brew for risky assets,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. The franc and the yen “will strengthen in times of stress.”

--Editors: Paul Cox, Greg Storey

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Allison Bennett in New York at abennett23@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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