Bloomberg News

Euro Gains Most in More Than Year on Accord; Yen Rises to Record

October 27, 2011

Oct. 27 (Bloomberg) -- The euro rallied the most in more than a year against the dollar after European leaders agreed to expand a rescue fund for indebted nations and reached an accord with lenders on writedowns for Greek debt.

The yen rose to a record versus the dollar for the fourth time in five days on speculation Bank of Japan measures will fail to contain the currency’s rally. The Australian dollar and the South African rand were the best performers against the U.S. currency after the world’s largest economy expanded at the fastest pace in a year, sapping demand for a refuge.

“European leaders bought themselves several months of time at least,” said Brian Dolan, chief strategist in Bedminster, New Jersey, at FOREX.com, a unit of the online currency trading firm Gain Capital. “Even before the summit, we had a push in the euro, down in the dollar, up in all the risk currencies, higher in stocks.”

The euro appreciated as much as 2.5 percent, more than 3 cents, to $1.4247, the highest since Sept. 6, before trading at $1.4189 at 5:03 p.m. New York time. It was the biggest rally on an intraday basis since July 2010. The euro advanced 1.7 percent to 107.76 yen. The yen increased 0.3 percent to 75.95 versus the dollar after touching the post-World War II high of 75.66.

The Standard & Poor’s 500 Index advanced 3.4 percent, erasing its loss for 2011. The Stoxx Europe 600 Index increased 3.6 percent. The S&P GSCI Index of 24 raw materials was 3 percent higher.

Boost in Aussie

The Aussie gained 3.2 percent to $1.0730 after rising to $1.0753, the highest since Sept. 1, as the European agreement and U.S. growth spurred demand for higher-yielding assets. South Africa’s rand increased 2.7 percent to 7.7222 versus the dollar

Sweden’s currency rose even after the Riksbank left its target lending rate at 2 percent and signaled fewer increases next year. The krona appreciated 2.8 percent against the U.S. currency to 6.3394.

“Even though the Riksbank says it will raise rates more slowly, it’s a measure of the relative outperformance of the Swedish economy that they are still talking about raising rates at all,” said Kit Juckes, head of foreign-exchange research at Societe Generale SA in London.

The euro rose after European leaders meeting yesterday for the second time in four days persuaded bondholders to take 50 percent losses on Greek debt and boosted the firepower of the rescue fund for indebted nations to 1 trillion euros ($1.4 trillion), responding to global pressure.

European Bonds

Yields on Italian 10-year bonds were up 34 basis points this month after dropping five basis points to 5.87 percent today. Spain’s yields decreased 15 basis points to 5.33 percent, paring their monthly advance to 19 basis points.

“The big moves are in equities; European and U.S. financials,” said Andrew Cox, a currency strategist at Citigroup Inc. in New York. “The biggest impact of this is it is dissuading fears of further stress on the financial system and further strain on funding. It bodes much better for broader risk appetite than it does for Europe.”

IntercontinentalExchange Inc.’s Dollar Index, used to track the greenback against the currencies of six major U.S. trading partners including the euro and yen, decreased 1.7 percent to 74.958 on reduced demand for a refuge. It was below its 200-day moving average for the first time since Sept. 15.

Commerzbank View

The Dollar Index may fall further after three weeks of losses if it closes below the average, according to Commerzbank AG, citing trading patterns.

The gauge would then be poised to decline a further 1.2 percent, Karen Jones, head of fixed-income, commodity and currency technical analysis in London at the firm, said in an e- mailed report.

U.S. gross domestic product grew at a 2.5 percent annual pace in the third quarter after advancing 1.3 percent in the previous three months, the Commerce Department reported. The reading matched the median forecast of 83 economists in a Bloomberg News survey.

The Canadian currency appreciated 1.3 percent to 99.09 cents per U.S. dollar, trading stronger than parity. Mexico’s peso rose 2 percent to 13.1343. The U.S. is the largest trading partner of the two nations.

The yen strengthened even after the Bank of Japan expanded its credit and asset-purchase programs to a total of 55 trillion yen ($724 billion) from 50 trillion yen to damp the currency’s appreciation, which harms exporters. It also kept the overnight lending rate at zero to 0.1 percent.

‘Unwind in Positions’

“The Bank of Japan is the only central bank in the world whose currency appreciates in the wake of more monetary stimulus,” said Jessica Hoversen, an analyst at the futures broker MF Global Holdings Ltd. in New York. “People have been dollar-bullish against the yen, and this could also be an unwind in positions.”

Hedge funds and other large speculators have placed net bets the yen will weaken against the dollar for 20 consecutive weeks, according to Commodity Futures Trading Commission data. Those positions were reduced by 8,212 contracts in the week ended Oct. 18 to the lowest since July.

Japan’s currency has gained 10.2 percent in the past six months against nine developed-nation counterparts, according to Bloomberg Correlation-Weighted Indexes. The dollar has risen 1.8 percent, and the euro has fallen 3 percent.

--With assistance from Emma Charlton, Matthew Brown and Keith Jenkins in London. Editors: Dennis Fitzgerald

To contact the reporter on this story: 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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