Bloomberg News

Euro Pares Declines as EU Reaches Agreement With Banks

October 26, 2011

(Corrects to show Bank of Japan meeting is one-day long in second paragraph.)

Oct. 26 (Bloomberg) -- The euro pared its loss against the dollar as European Union leaders said they reached agreement on a plan to recapitalize the region’s banks.

The shared currency also eliminated declines against the yen after reports China may be willing to respond to a European request to help fund a package to solve the euro region’s debt crisis. The dollar strengthened against the Japanese currency before the Bank of Japan holds a one-day policy meeting, after reaching a record low. Canada’s dollar and Mexico’s peso were the best performers against the euro as U.S. durable goods orders were stronger than expected.

“The market seems to have reacted a bit positively to the mere dribble of information we’ve received,” said John McCarthy, managing director of currency trading at ING Groep NV in New York. “A lot of people are on the sidelines waiting until everything’s clear. There’s some conclusions. Whether or not it’s sufficient, we’ll have to see.”

The euro was little changed at $1.3906 at 5 p.m. in New York, after falling 0.8 percent earlier. It rose 0.1 percent to 105.93 yen, after earlier declining 1 percent. Japan’s currency fell 0.1 percent to 76.18 per dollar, after strengthening to a record 75.72.

The leaders of the 27-member European Union released a statement after the meeting in Brussels today.

The implied volatility for one-week euro-dollar options, which indicate expected swings in the underlying currencies, rose 65 basis point to 15.98 percent. It touched 18.48 percent on Oct. 21, the highest since Oct. 6.

Bank of Japan

In the past month the yen has reached record strength against the dollar on Oct. 21, Oct. 25 and today.

Bank of Japan officials will discuss more monetary easing at the meeting, the Nikkei newspaper reported Oct. 25. Measures to mitigate the impact of the strong yen on Japan’s economy may include expanding a 50-trillion yen ($660 billion) asset purchase program by 5 trillion yen and purchasing bonds with maturities longer than two years, the Nikkei said without citing anyone.

“Every day, week, we seem to get a little bit lower for the dollar-yen and the Bank of Japan is very nervous about this,” John Taylor, founder of the world’s largest currency- hedge fund, in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. But they know that if they call up their G-10 friends, they will say ‘forget about it, we have other problems, like Europe - you guys go away’.’’

“I’ve ordered my staff to be prepared to take action at any time,” Finance Minister Jun Azumi told reporters in Tokyo. He declined to comment on the timing of any yen sales in parliament today and said conducting coordinated intervention in the currency market is a “difficult thing.”

European Pass

“There’s a lack of liquidity right now because most people are smart enough not to do anything until things are official,” said Brian Taylor, chief currency trader a Manufacturers & Traders Trust in Buffalo New York. “They always seem to give a pass to Europe, there seems to be jawboning, talking about a plan, talk about creating a plan and people go crazy and buy euros.”

The euro depreciated 3.2 percent in the past six months, the second-worst performer among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Currency Indexes. The yen gained 13 percent and the dollar has advanced 3.7 percent, the indexes show.

EU leaders have set a deadline of June 30, 2012, for banks to have core capital reserves of 9 percent after writing down their holdings of sovereign debt. The reserves must be of the “highest quality,” the leaders said in a statement after a summit today.

Chinese Speculation

China has an open attitude and will discuss options for cooperation with EU officials, AFP said. Other large emerging countries such as Brazil and Russia favor using the International Monetary Fund as a way of getting any aid to Europe, Agence France-Press said, citing unidentified officials.

French President Nicolas Sarkozy plans to call Chinese President Hu Jintao tomorrow to discuss China contributing to a planned euro-area investment vehicle, a person familiar with the matter told Bloomberg News.

The U.S. is the largest trading partner of Canada and Mexico, buoying the Canadian currency 1.2 percent to C$1.0042 per U.S. dollar. Mexico’s peso rose 0.9 percent to 13.4023 per dollar.

Orders for U.S. durable goods excluding transportation equipment rose in September by the most in six months, showing manufacturing is supporting the expansion. Demand for goods meant to last at least three years, outside of airplanes and automobiles, climbed 1.7 percent, figures from the Commerce Department showed today in Washington.

--Editors: Dave Liedtka, Greg Storey

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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