Bloomberg News

Euro Advances Against Dollar, Yen as German Confidence Jumps

February 24, 2012

Feb. 23 (Bloomberg) -- The euro climbed against the dollar and the yen as a report showed German business confidence rose to the highest level in seven months in February amid progress in taming the region’s debt crisis.

The 17-nation currency increased to the most in more than two months versus dollar as U.S. initial jobless claims held at a four-year low, damping demand for safety. The yen rose against the greenback, snapping a five-day losing streak that was its longest in 10 months. Norway’s krone reached its strongest level against the euro in nine years as a measure of volatility among Group of Seven currencies dropped to a more than a three-year low.

“The strength of the German survey was the fundamental catalyst for a push up through $1.33 in euro-dollar,” said Ray Attrill, a senior currency strategist at BNP Paribas SA in New York. “It looks like risk appetite is reasonably well underpinned.”

The euro strengthened 0.3 percent to $1.3294 at 9:08 a.m. New York time, after reaching $1.3343, the most since Dec. 12. It advanced 0.3 percent to 106.69 yen and was little changed at 84.61 British pence. The yen rose 0.1 percent to 80.22 against the dollar after five days of losses that was the longest such streak since April.

The Munich-based Ifo institute said its business climate index climbed to 109.6 from 108.3 in January, the highest reading since July, amid euro area efforts to prevent a default by Greece.

‘Continued Optimism’

“The German news speaks to continued optimism that Germany will be able to carry the load as far as Europe is concerned,” said Jack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto. “Greece has definitely not gone away but the announcement of the bailout has taken the country marginally away from the disorderly-default precipice.”

The euro stayed higher even as European Commission data forecast that Europe’s economy will shrink in 2012, with Italy and Spain facing sudden crunches as they battle to escape the debt crisis. The euro bloc will contract 0.3 percent, the commission said, abandoning a November forecast of 0.5 percent growth. The downgrade was mainly due to projected contractions of 1.3 percent in Italy and 1 percent in Spain.

Derivatives showed an improved demand for euros as the currency’s one-month options risk-reversal rate rose to minus 1.2950 percent, from minus 1.9625 percent at the start of the week. The change signals a relative decrease in the demand for put options, which grant traders the right to sell the euro versus the dollar.

Risk Reversals

Further euro gains may be limited as the Institute of International Finance said in its February Global Economic Monitor that an orderly resolution of the Greek debt crisis “remains a key challenge.” There is the “risk of a subsequent debt restructuring,” following the pending private-sector involvement deal, according to the IIF, which has been negotiating on behalf of private creditors in talks with Greece.

Implied volatility of three-month options on Group of Seven currencies as tracked by the JPMorgan G7 Volatility Index fell as low as 9.78 percent today, the least since August 2008. A lower figure 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 U.S. currency has risen 4.9 percent in the past six months, the second-biggest advance, after the Australian dollar, among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes.

Jobless Claims

Applications for jobless benefits were unchanged in the week ended Feb. 18 at 351,000, the fewest since March 2008, Labor Department figures showed today. The median projection in a Bloomberg News survey called for 355,000 claims, marking the fourth straight week that the figures have been better than forecast. The number of people on unemployment benefit rolls dropped to the lowest level since August 2008.

Goldman Sachs Group Inc. recommended investors bet on the appreciation of Norway’s krone against the pound as rising oil prices boost demand for the Scandinavian nation’s currency and the central bank finds it difficult to stem gains.

“Norges Bank likely has little scope to use monetary policy to prevent further Norwegian krone strength,” according to a client note from analysts headed by Thomas Stolper, the London-based chief currency strategist. Investors should position for gains in the krone toward 8.60 per pound and exit the position on a one-day close above 9, Goldman Sachs said.

Crude Oil

The krone traded at 8.8363 per U.K. pound, compared with 8.8532 yesterday. It strengthened 0.5 percent to 5.6234 per dollar and climbed 0.2 percent to 7.4752 per euro, after strengthening as much as 0.7 percent to 7.4371, the strongest level since January 2003.

Crude oil for April delivery rose 0.5 percent to $106.43 in electronic trading on the New York Mercantile Exchange today after advancing to $106.80, the highest level since May 5. Norway is the world’s seventh-biggest oil exporter.

“The risk,” said BNP’s Attrill, “is that the next big worry wart is going to be this continued strength in oil prices.”

--With assistance from Masaki Kondo in Singapore, Keith Jenkins in London and Monami Yui in Tokyo. Editors: Kenneth Pringle, Greg Storey

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

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


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