Bloomberg News

Euro Rises Most in a Year as Merkel, Sarkozy Plan Bank Support

October 10, 2011

Oct. 10 (Bloomberg) -- The euro rose the most in more than a year against the dollar after French and German leaders pledged to deliver a plan to support banks and repeated a commitment to keep Greece in the single-currency bloc.

The dollar dropped against all of its major counterparts as global stocks advanced, sapping demand for the greenback as a haven. German Chancellor Angela Merkel and French President Nicolas Sarkozy said in Berlin yesterday they have given themselves three weeks to devise a plan to recapitalize banks and find a “durable” solution for Greece’s debt load. Currencies of commodity-exporting countries rallied as raw materials gained.

“There’s a sense now that we’re marching toward some attempt at a broader plan to support the euro area,” said Alan Ruskin, global head of Group-of-10 foreign-exchange strategy at Deutsche Bank AG in New York. “We’re drawing to a point where they will come up with a plan and the market is willing to give them the benefit of the doubt until we see the plan.”

The euro advanced 2 percent at $1.3642 as of 5 p.m. in New York, and gained as much as 2.4 percent, the most since July 2010. It traded as high as $1.3699, the strongest level since Sept. 21. The 17-nation currency rose 1.9 percent to 104.59 yen, with the Japanese currency trading little changed at 76.68 per dollar.

Futures Positions

The 17-nation euro remained higher as the European Central Bank is opposed Germany’s push to rewrite the euro area’s 12 week-old-rescue plan as leaders prepare the ground for a potential Greek default, a central bank official said.

Hedge funds and other large speculators increased their net short euro positions to 82,697 contracts in the week ended Oct. 4, the most since June 2010. A short is a bet the price of an asset will fall.

A Labor Department report showed Oct. 7 that employment in the U.S. rose more than forecast last month. U.S. payrolls climbed by 103,000 workers, after a revised 57,000 increase the prior month that was more than originally estimated, data showed.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners including the euro and the yen, declined 1.5 percent to 77.557.

The MSCI World index of equities rallied 2.7 percent and the Standard & Poor’s 500 Index rose 3.4 percent.

European leaders will deliver a plan by the Group of 20 summit meeting on Nov. 3, Sarkozy said. They will do “everything necessary” to ensure banks have enough capital, Merkel said.

Euro Plan

“The markets are reacting to the pledge for further action,” said Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. in New York. “Market positioning with regard to the euro is so short. When you take the market positioning, the payrolls on Friday, plus this pledge, that’s helping to see some buying back up of euro.”

The shared currency also advanced as Belgium agreed to buy the local consumer-lending unit of Dexia SA, ending a 15-year cross-border experiment with France after the European debt crisis deepened. Belgium will pay 4 billion euros ($5.5 billion) for the division and guarantee 60 percent of a so-called bad bank to be set up for Dexia’s troubled assets, Finance Minister Didier Reynders said at a press conference today in Brussels.

The euro stayed higher even as a report showed European investor confidence fell to the lowest in more than two years. An index measuring sentiment in the euro region declined to minus 18.5 in October from minus 15.4 in September, the Limburg, Germany-based Sentix research institute said in an e-mailed statement today. That’s the lowest since July 2009.

Pound Falls

Sterling weakened 1.3 percent to 87.07 pence per euro and was 0.7 percent stronger at $1.5668. An index of consumer sentiment about hiring prospects in the U.K. fell 1 point to minus 67 from August, taking its decline over the third quarter to 17 points, a unit of Lloyds Banking Group Plc said in an e- mailed statement in London today. A measure of job security was unchanged at minus 21.

The Swiss franc strengthened against the euro by the most since Sept. 5, the day before the Swiss National Bank imposed a ceiling of 1.20 versus the common currency and resumed purchases of foreign currencies to curb the franc’s advance. The franc rose 0.6 percent to 1.2329 per euro and was the best performer among the major currencies.

The SNB may raise its ceiling for the franc to 1.30 per euro from 1.20 per euro, according to the private-banking unit of JPMorgan Chase & Co.

Setting Ceiling

“We remain of the view that a further upward adjustment in the ceiling is both justified and likely,” Audrey Childe- Freeman, global head of currency strategy at JPMorgan Private Bank in London, said in an e-mailed research note today.

The Thomson Reuters/Jefferies CRB Index of raw materials advanced 1.7 percent, boosting support for currencies of countries that export commodities.

Australia’s dollar advanced beyond parity with the greenback to the highest level since Sept. 22, rising to as much as $1.0015. Canada’s dollar strengthened 1.3 percent to C$1.0258 per U.S. dollar.

The Polish zloty strengthened 3.5 percent to 3.1574 per dollar after Prime Minister Donald Tusk won yesterday’s general election. Russia’s ruble climbed for a fourth day, adding 2.4 percent to 31.5611 per dollar.

The Chinese currency climbed against the dollar amid speculation policy makers will tolerate gains after the U.S. said the Asian nation undervalues its currency.

The yuan appreciated 0.6 percent to 6.3486 per dollar in Shanghai, the strongest closing level since the country unified the official and market exchange rates at the end of 1993, according to the China Foreign Exchange Trade System. That was the biggest daily increase since China loosened the yuan’s peg to the dollar on July 21, 2005. China’s financial markets were closed for National Day holidays last week.

--With assistance from Jennifer Ryan and Emma Charlton in London, Jana Randow in Frankfurt, Fion Li in Hong Kong, Masaki Kondo and Kristine Aquino in Singapore. Editors: Paul Cox, Greg Storey

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net


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