Bloomberg News

Euro Rises as Greece Says Debt Talks Progressing; Dollar Weakens

January 31, 2012

Jan. 31 (Bloomberg) -- The euro strengthened against the dollar, snapping its biggest decline in two weeks, after Greek Prime Minister Lucas Papademos said progress had been made in debt-swap talks with bondholders.

The 17-nation currency climbed for the first time in four days versus the yen after European chiefs meeting in Brussels yesterday agreed to accelerate the introduction of a permanent 500 billion-euro ($659 billion) rescue fund and signed a deficit-control treaty. The dollar and yen fell versus their commodity-exporting counterparts such as the New Zealand dollar and South African rand as stocks rallied and investors sought higher-yielding assets.

“I don’t think peace has broken out, even if we have some short-term problems sorted in Europe,” said Thomas Molloy, chief dealer at FX Solutions, an online currency-trading company, in Saddle River, New Jersey. “It’s risk-on today, but more as a result of what’s going on despite Europe rather than what is going on in Europe, and the rising tide is floating all boats.”

The euro gained 0.2 percent to $1.3171 at 9:07 a.m. New York time after sliding 0.6 percent yesterday, the biggest decline since Jan. 13. The European shared currency climbed 0.2 percent to 100.49 yen. The dollar was little changed at 76.29 yen after falling to 76.18 yen, the weakest level since Oct. 31.

The euro is headed for its first monthly advance since October versus the dollar and the yen. The shared currency has appreciated 1.6 percent against the greenback, and risen 0.8 percent versus the yen.

Winners, Losers

New Zealand’s dollar is the best performer year-to-date among the 10 developed nation currencies measured by the Bloomberg Correlation-Weighted Indexes, with a 4.5 percent gain. The dollar is the worst performer, falling 2.5 percent. The euro has declined 0.8 percent and the yen has weakened 1.6 percent.

Implied volatility of three-month options of Group of Seven currencies dropped to 10.45 percent, from as high as 10.61 percent yesterday, according to the JPMorgan G7 Volatility Index. A decrease makes investments in currencies with higher benchmark lending rates more attractive as the risk in such trades is that market moves will erase profits.

The dollar and yen, whose countries’ interest rates are near zero, weakened as investors sold the currencies to fund investments in higher-yielding counterparts. The New Zealand dollar advanced 1.1 percent to 82.82 U.S. cents, Australia’s currency climbed 0.6 percent to $1.0666 and South Africa’s rand gained 1 percent to 7.7642 per dollar.

Futures on the Standard & Poor’s 500 Index advanced 0.5 percent and the S&P GSCI Index of 24 raw materials rose 0.9 percent.

Greece ‘Focused’

The Dollar Index, which IntercontinentalExchange Inc. uses to track the currency against those of six U.S. trading partners, fell 0.3 percent.

Papademos said he’s “focused on the target of bringing the negotiations to a successful conclusion by the end of the week” for a debt-swap agreement with Greece’s creditors. Representatives of the European Commission, the European Central Bank and the International Monetary Fund want more fiscal tightening and wage cuts from Greece, the prime minister told reporters after the European Union meeting.

“The summit will likely be viewed as a success relative to modest expectations, and this eliminates some event risk for the euro system,” Peter Von Maydell, head of currency strategy at Credit Suisse Securities in London, wrote in a note to clients. “However, markets have likely largely priced in a successful outcome already given the rallies in the last week.”

Dollar-Yen

The cost to protect against a drop in the euro versus the dollar fell from a three-week high. Risk-reversal rates for three-month options on the euro versus the dollar shrank to negative 1.82 today from negative 1.86 yesterday, the most since Jan. 9. The measure reached negative 4.4 percent in November.

Japan refrained from selling yen in the foreign-exchange market this month, the Ministry of Finance said today on its website. The nation sold the currency on Oct. 31 when it climbed to a postwar record of 75.35 per dollar.

Japan’s Finance Minister Jun Azumi said his ministry is prepared to take “decisive” measures to curb the yen’s appreciation as it approached a post-World War II high.

Indonesia’s rupiah completed the best start to a year since 2008, after the country regained investment-grade status. The currency rose 0.8 percent to 8,995 per dollar this month, according to prices from local banks compiled by Bloomberg.

--With assistance from Jeanette Rodrigues in Mumbai and Masaki Kondo in Singapore. Editors: Kenneth Pringle, Greg Storey

To contact the reporters on this story: Allison Bennett in New York at abennett23@bloomberg.net; David Goodman in London at dgoodman28@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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