Bloomberg News

Euro Advances as Greece Approves Austerity, ECB Meeting Nears

June 29, 2011

June 29 (Bloomberg) -- The euro reached two-week high against the dollar as investors raised bets the European Central Bank will increase interest rates next week after the passage of austerity measures by Greek lawmakers.

The 17-nation currency also gained against the Swiss franc and Taiwan’s dollar after Greek Prime Minister George Papandreou garnered enough votes for his 78 billion euro ($112 billion) package of budget cuts and state asset sales needed to tap a fifth portion of last year’s rescue. The dollar sank as stocks and commodities rose amid reduced concern about the European debt crisis, buoying risk demand. Canada’s dollar rallied as consumer prices increased more than forecast.

“With the vote out of the way for the time being, we should see a renewed focus on ECB hawkishness,” said Ray Attrill, a New York-based currency strategist for BNP Paribas SA. “Institutional investors have been very sidelined in the last few weeks because of the uncertainty leading up to the vote. If the air was cleared for the time being on Greece, that paves the way for a resumption of delayed euro-dollar buying.”

The shared currency rose 0.5 percent to $1.4435 at 5:02 p.m. in New York, from 1.4371 yesterday. It gained to $1.4448, the strongest since June 15. The euro was little changed against the yen at 116.61. The dollar fell 0.4 percent to 80.78 yen.

The euro has risen 0.3 percent against the dollar this month, bringing its gain this quarter to 2 percent. The yen has gained 1 percent so far in June and has increased 2.9 percent in the last three months.

European Rates

The implied yield on three-month Euribor futures rose with the June 2012 contract gaining nine basis points to 2 percent as traders added to bets policy makers will boost rates during the next year. ECB President Jean-Claude Trichet said yesterday policy makers are in “strong vigilance mode,” signaling they intend to raise interest rates next week even as Greece struggles to avert a default.

“We’re taking the decision progressively to anchor inflation expectations,” Trichet said at a press conference in Amsterdam following a seminar with central bankers from the Asia-Pacific region.

IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, dropped 0.6 percent to 74.623 as the Standard & Poor’s 500 Index advanced 0.8 percent. The S&P’s GSCI index of raw materials climbed 2.1 percent.

Commodities Trend

Currencies of commodity-exporting countries rose the most against the dollar among the major currencies as raw materials prices advanced. The Thomson Reuters/Jefferies CRB Index of commodities added 1 percent.

“There’s definitely a strong focus on commodity prices today, which is helping the Aussie, kiwi and Canada outperform,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “Risk appetite has stabilized and commodities are firmer.”

Canada’s dollar rose 1.2 percent to 96.95 cents per U.S. dollar. New Zealand’s currency appreciated 1.6 percent to 82.53 cents and the Aussie added 1.4 percent to $1.0683.

The loonie, as the Canadian currency is also known for the image of the aquatic bird on the C$1 coin, also rose as consumer prices in Canada advanced 0.7 percent in May after a 0.3 percent gain in the previous month, Statistics Canada said today in Ottawa, making it more likely that the central bank will resume boosting borrowing costs.

Bank of Canada

The Bank of Canada kept its benchmark overnight lending rate at 1 percent on May 31, where it has been since September. Investors expect the central bank to increase interest rates by 47 basis points in the next 12 months, from 35 basis points yesterday, according to a Credit Suisse Group AG index based on swaps.

The franc slipped versus all of its major peers after the nation’s economic barometer fell in June, adding to signs the franc’s ascent and a faltering euro-region economy may hurt economic growth.

The monthly gauge that aims to predict the economy’s direction about six months ahead dropped to 2.23 from 2.30 in May, the KOF Swiss Economic Institute in Zurich said today.

The Swiss currency slid 0.7 percent to 1.2042 per euro. The franc fell 0.3 percent to 83.42 centimes per dollar. It reached 82.76 centimes per dollar yesterday, a record high.

The franc is the biggest gainer among the major currencies this quarter, rising 10 percent against the dollar.

Papandreou won approval of his package of budget cuts and asset sales, which is crucial to receiving further international financial aid.

A total of 155 lawmakers in the 300-strong chamber supported the law and 138 voted against, Parliament Speaker Filippos Petsalnikos said in remarks carried live on state-run Vouli TV today. Parliament will tomorrow hold a vote on implementing the austerity plan.

The vote came amid a 48-hour strike and scuffles outside parliament that saw police fire tear gas at demonstrators protesting budget cuts and asset sales.

The euro has gained 2.6 percent this year against a basket of nine developed-market peers, according to Bloomberg Correlation-Weighted Currency Indexes. The yen has weakened 5.2 percent, while the dollar is down 5.7 percent.

--With assistance from and Chris Fournier in Halifax. Editors: Paul Cox, Dave Liedtka

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

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


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