Bloomberg News

Euro Erases Earlier Loss on Bets ECB Will Raise Interest Rates

June 29, 2011

June 29 (Bloomberg) -- The euro erased earlier losses versus the dollar and headed for a second quarterly gain on speculation Greece’s debt crisis won’t prevent the European Central Bank from raising interest rates next week.

Demand for the euro was limited amid protests in the streets of Athens before Greece’s parliament votes on an austerity package needed to secure more financial aid. The dollar was near a three-week high versus the yen after Treasury yields jumped yesterday, enhancing the allure of U.S. assets. South Korea’s won rose for a second day on speculation the central bank will boost interest rates after the government raised its inflation forecast.

“The euro’s got a bit more upside from here,” said Joseph Capurso, a currency strategist in Sydney at Commonwealth Bank of Australia, the nation’s biggest lender. “While we hear a lot about Greece, it’s really a lot of noise because the bottom line is that the European economy is strong enough to get the ECB raising rates.”

The euro was at $1.4378 at 6:38 a.m. in London from $1.4371 in New York yesterday, when it reached $1.4397, the highest since June 22. It’s down 0.1 percent against the greenback this month and up 1.6 percent this quarter.

The shared currency traded at 116.52 yen from 116.58, after falling as much as 0.4 percent earlier. The dollar fetched 81.04 yen from 81.12. It touched 81.27 yen yesterday, the strongest since June 2. The Swiss franc reached 82.76 centimes per dollar yesterday, a record high, before trading at 83.06 today.

‘Strong Vigilance’

ECB President Jean-Claude Trichet said yesterday that policy makers are in “strong vigilance mode,” supporting expectations for an interest-rate increase at the central bank’s meeting on July 7. The ECB raised its benchmark rate in April for the first time in almost three years, lifting it by a quarter point to 1.25 percent.

Police fired tear gas to disperse protesters in Athens as labor unions shut down government services before today’s vote. Prime Minister George Papandreou has called on lawmakers to “do their patriotic duty” and pass the 78 billion-euro ($112 billion) austerity package that will determine if his indebted nation can receive further rescue funds.

That, and a successful vote tomorrow to authorize implementation of the plan, would enable Finance Minister Evangelos Venizelos to appear at a meeting of finance ministers this weekend in Brussels.

Scope for Gains?

“I’m kind of cautious how much further upside the euro does have,” said Mike Burrowes, currency strategist at Bank of New Zealand Ltd. in Wellington. “I suspect some of the drive higher in the euro has been driven by squaring off short positions rather than reflecting a passing of the vote will actually solve the situation in Greece.”

The yen pared an earlier advance against the euro on speculation Japanese investors will buy overseas assets in search of higher returns.

“Greece’s austerity measure are expected to pass, and plus, there are a lot of mutual funds” planning to raise money tomorrow, said Yuji Saito, director of the foreign-exchange department at Credit Agricole Corporate and Investment Bank in Tokyo. “There’s speculation the yen will be sold to buy foreign currencies. That’s supporting the euro as well.”

Demand for Assets

Demand for the dollar was supported on prospects rising returns on U.S. assets will attract global investors. Treasury 10-year yields touched 3.05 percent yesterday, the highest since June 15, and were at 3.02 percent today.

“The back-up in yields that we did see yesterday in the U.S. should provide some support, particularly against cross currencies like the Japanese yen,” said John Horner, a currency strategist in Sydney at Deutsche Bank AG.

IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, was little changed at 75.011.

The dollar has fallen 5 percent this year, according to Bloomberg Correlation-Weighted Currency Indexes. The yen is down 4.9 percent, while the euro is up 2.9 percent.

The won rose after the presidential office said yesterday that consumer-price inflation will be around 4 percent this year, compared with the government’s target of 3 percent.

“Comments on inflation are adding to speculation that the central bank may need to raise interest rates in the second half,” said Kong Dong Rak, fixed-income analyst at Taurus Investment & Securities Co. in Seoul.

The won gained to 1,077.15 per dollar from 1,083.55 yesterday. South Korea’s currency has strengthened 1.9 percent versus the greenback this quarter.

--With assistance from Allison Bennett in New York, Ron Harui in Singapore and Seyoon Kim in Seoul. Editors: Jonathan Annells, Nicholas Reynolds

To contact the reporters on this story: Yoshiaki Nohara in Tokyo at ynohara1@bloomberg.net; Kristine Aquino in Singapore at kaquino1@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.


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