Bloomberg News

Euro Advances From 16-Month Low as Leaders Meet; Franc Climbs

January 09, 2012

Jan. 9 (Bloomberg) -- The euro gained from the lowest level in 16 months versus the dollar as the leaders of Germany and France discussed a rulebook for closer fiscal union among the nations that share the currency.

The Swiss franc gained on bets central-bank Chairman Philipp Hildebrand’s resignation threatens the nation’s currency ceiling. New Zealand’s dollar and Brazil’s real were the top performers against the dollar. The euro pared gains versus the greenback after German industrial production fell, following data last week showing the U.S. added more jobs than forecast, and after the meeting on the Europe’s debt crisis ended.

“It’s another meeting that talks about how this problem can be dealt with, but they were shy on any substantive steps,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto. “Both fundamentally and technically, the euro is suggested to go continuously lower.”

The 17-nation currency advanced 0.4 percent to $1.2765 at 5 p.m. New York time, after earlier falling to $1.2666, its weakest level since Sept. 10, 2010. The euro gained 0.2 percent to 98.08 yen after dropping earlier to 97.28, the least since December 2000. The dollar fell 0.1 percent to 76.86 yen.

The euro rose today as traders purchased the shared currency to close short positions, rather than on optimism about the European-crisis discussions, according to Adam Cole, head of global currency strategy at Royal Bank of Canada’s RBC Europe unit in London. A short position is a bet a currency will fall.

‘Very Stretched’

“It’s more to do with very stretched positioning than anything else,” Cole said.

Futures traders increased their bets earlier this month to a record high that the euro will decline against the dollar. The difference between wagers that the shared currency would fall versus those that it would rise surged to 138,909 in the week ended Jan. 3, according to data from the Commodity Futures Trading Commission released Jan. 6.

The euro will decline to $1.27 by the second quarter, according to the median forecast of analysts surveyed by Bloomberg. That’s down from a previous estimate of $1.28.

German Chancellor Angela Merkel, at a joint press conference with French President Nicolas Sarkozy after they met today in Berlin, said “really good progress” is being made in negotiations. The session will be followed by a round of talks among euro-area leaders before a summit in Brussels Jan. 30.

‘Fiscal Compact’

The leaders of Europe’s two biggest economies are fleshing out a blueprint for budgetary discipline negotiated at a Dec. 9 summit that seeks to create a “fiscal compact” for the euro region to save the shared currency. Merkel said it may be ready by Jan. 30. The two nations also “are ready to examine” how to speed up capital payments into the European Stability Mechanism, the region’s permanent rescue fund, Merkel said.

The dollar trimmed losses earlier after industrial production in Germany dropped 0.6 percent in November following an 0.8 percent increase the previous month. The median estimate in a Bloomberg News survey was for an 0.5 percent decrease.

Germany sold 3.9 billion euros ($5 billion) of six-month treasury bills today at a negative yield for the first time as investors sought the debt of Europe’s biggest economy as a haven. The bills drew an average yield of negative 0.0122 percent, the Federal Finance Agency said in an e-mailed statement.

“Germany issuing at negative yields today suggests that money is not necessarily leaving Europe but being redistributed within the region,” said Spitz of National Bank of Canada.

Swiss Franc

The franc rose to the strongest level since September against the euro after the nation’s central bank president quit. Hildebrand stepped down after a currency transaction by his wife last year dented his credibility.

The Swiss National Bank said in a statement its cap of 1.20 francs per euro “remains unchanged.” It imposed the ceiling on Sept. 6 to halt the currency’s advance as Europe’s debt crisis fueled demand for the relative safety of Swiss assets.

SNB Vice President Thomas Jordan will take over interim leadership of the bank, Hildebrand said in a resignation speech.

The franc gained 0.2 percent to 1.21213 per euro after touching $1.2108 earlier, the strongest since Sept. 20. It advanced 0.6 percent to 94.96 centimes per dollar.

Brazil’s real strengthened 1.3 percent to 1.8332 per dollar. New Zealand’s dollar rose 0.9 percent to 78.72 U.S. cents and gained 0.7 percent to 60.49 yen.

The dollar has gained 1.4 percent over the past week against nine developed-nation peers tracked by Bloomberg Correlation-Weighted Indexes. The euro lost 1.1 percent and the yen has advanced 1.2 percent.

Dollar Index

IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, fell for the first time in four days. The gauge declined 0.3 percent today to 80.995 after earlier climbing to 81.503, the highest level since Sept. 20, 2010.

Bets on dollar strength have reached “extreme” territory for the first time since March 2010, according to Morgan Stanley, citing an aggregate measure including client flow data and market futures positions.

Buying of the U.S. currency last week by Morgan Stanley’s clients reached the 85th percentile of the past two years, Calvin Tse, a London-based currency strategist at the company, said in an interview.

The dollar capped its fifth weekly gain on Jan. 6 as Labor Department data showed U.S. payrolls added 200,000 jobs last month, more than forecast, and the unemployment rate unexpectedly dropped to 8.5 percent.

“The correlation between good U.S. data equaling a weak dollar is beginning to break down now that we’re seeing signs of a more sustained recovery in the U.S.,” said Mike Jones, a currency strategist at Bank of New Zealand in Wellington. “There’s a clear fundamental shift in favor of the U.S. dollar.”

--With assistance from Keith Jenkins in London, Matthias Wabl in Zurich, Catarina Saraiva in New York and Chris Fournier in Halifax, Nova Scotia. Editors: Greg Storey, Dave Liedtka

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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