Bloomberg News

Euro Gains Against Majors Amid Greek Debt Impasse; Yen Declines

February 12, 2012

Feb. 11 (Bloomberg) -- The euro gained against the majority of its most-traded counterparts as the central bank saw signs of “stabilization” in the region and investors speculated Greece would convince European leaders to release its aid package.

The euro held on to weekly advances against the dollar and yen as Greek Prime Minister Lucas Papademos secured approval from his Cabinet to submit laws for new budget measures designed to secure a second rescue package. The yen had the biggest decline versus the dollar in three months as Japan’s current- account surplus slid to a 15-year low in 2011. The cost of living in the U.S. rose 0.3 percent in January after holding steady in December, data next week is forecast to show.

“There’s been a roadblock but the market still believes a deal is going to get done,” Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York, said on yesterday. “The rally was all in anticipation of that and, clearly, it’s not coming this week. So there is some disappointment, but we are not pricing a disorderly default at this point.”

The euro rose 0.3 percent to $1.3197 and gained 1.63 percent to 102.43 versus the yen. The Japanese currency fell 1.32 percent per dollar.

The Greek cabinet approved the 287-page document unanimously, said a government official, who declined to be named. The 300-seat Parliament will vote, as soon as today, on the budget measures. The approval capped a week of tension as European Union and International Monetary Fund officials argued with Greek government officials over the conditions required to secure the 130 billion-euro ($172 billion) rescue package.

‘Very Complacent’

Futures traders decreased bets the euro will fall versus the dollar, lowering so-called net shorts for a second week. The difference between wagers that the shared currency will weaken versus those that it will rise narrowed to 140,593 on Feb. 7, data from the Commodity Futures Trading Commission showed.

“The market is very complacent about the political ill will that this situation has generated in Greece,” Boris Schlossberg, director of research at online currency trader GFT Forex in New York, said yesterday. “If the Greek situation is resolved, then you have core Europe continuing to expand at a surprising rate and tensions in the credit market beginning to ease.”

European Central Bank President Mario Draghi said Feb. 9 it would lower the collateral requirements to access the next three-year loan auction later this month. He also said surveys confirm “signs of stabilization” in the region.

The ECB maintained policy makers’ main refinancing rate at 1 percent, in line with the estimates of 55 of 57 analysts in a Bloomberg News survey.

Euro Rallies

The so-called 25-delta risk reversal rate for the euro versus the dollar fell to minus 2.38 percent, from minus 2.18 percent on Feb. 3. A negative rate signals greater demand for euro puts, the right to sell, relative to calls, the right to buy the common currency.

The euro has rallied 4.3 percent versus the dollar from the January low of $1.2624 amid speculation Greek lawmakers would satisfy demands from the European Commission, ECB and International Monetary Fund to receive the 130 billion-euro ($172 billion) aid package. It is trading 11 cents above its lifetime average of $1.2060.

The euro gained 0.1 percent to 1.20959 versus the Swiss franc. It breached the 1.21 mark on Feb. 7 for the first time since Jan. 25. Swiss central bank interim Chairman Thomas Jordan said the currency remains “very strong” and policy makers can’t allow it to appreciate further. The Swiss National Bank imposed a 1.20 cap on the currency on Sept. 19.

‘Strong-Arm’ Greeks

“In the end, the euro politicians will strong-arm the Greeks into the austerity measures,” Martin Briggs, senior risk consultant for AFEX Markets Plc in London, said on Feb. 9.

The euro strengthened 0.4 percent against nine developed- nation counterparts over the past week, according to Bloomberg Correlation-Weighted Indexes. The dollar rose 0.3 percent and the yen fell 1.2 percent.

Japan’s yen declined versus 14 of 16 most-traded counterparts as central bank Governor Masaaki Shirakawa said the nation’s economic condition is “severe” because of deflation and the strong currency. The central bank is implementing monetary easing measures and will take appropriate steps as needed, he said in parliament in Tokyo on Feb 6.

The nation’s current-account surplus shrank 44 percent in 2011 from the previous year to 9.63 trillion yen ($125 billion), the lowest since 1996. The trade surplus makes the currency attractive as a haven because it means the nation doesn’t have to rely on overseas lenders.

Implied Volatility

The yen’s losses were supported as implied volatility of three-month options for Group of Seven currencies reached a 3½- year low, 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 compared to near zero interest rates in Japan.

Australia’s dollar had its first loss in eight weeks versus the greenback, falling 0.9 percent to $1.0673, as forecasts for growth and inflation from the Reserve Bank were lowered and retail sales fell. It touched $1.0845 on Feb. 8, the strongest since Aug. 2 after the central bank unexpectedly maintained the benchmark interest rate at 4.25 percent. It gained 0.4 percent to 82.84 yen.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, was 0.5 percent higher at 79.004. The gauge is weighted 57.6 percent to movements in the euro.

The pound weakened 0.4 percent to $1.5755 against the dollar and 0.7 percent to 83.76 per euro after the Bank of England said it would increase its bond-buying program by less than some economists forecast.

The Monetary Policy Committee raised the target for bond purchases by 50 billion pounds ($79.3 billion) to 325 billion pounds, more than a quarter of current outstanding gilts.

--With assistance from David Goodman in London. Editors: Kenneth Pringle, Greg Storey

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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