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The euro strengthened toward a three-month high against the dollar as the European Central Bank prepared to allot three-year loans tomorrow to improve the liquidity of the region’s banks.
The 17-nation currency advanced versus the yen amid speculation cash injected by the ECB’s second long-term refinancing operation will spur demand for euro-area assets even after Standard & Poor’s downgraded Greece to “selective default” yesterday. The dollar weakened on reduced refuge demand before a U.S. report economists said will show consumer confidence in the world’s largest economy improved. The pound rose against the greenback after an index of U.K. retail sales climbed.
“The markets have treated the Greek headlines as old news and are focusing on the positives of the ECB liquidity injection tomorrow,” said Vassili Serebriakov, a currency strategist at Wells Fargo & Co. in New York. “There’s a general risk-on, equity-market-gains kind of background.”
The euro rose 0.3 percent to $1.3432 at 9:37 a.m. New York time, after rising to $1.3487 on Feb. 24, the highest level since Dec. 5. The shared currency gained 0.1 percent to 108.09 yen. The yen strengthened 0.2 percent to 80.43 per dollar after depreciating to 81.67 yesterday, the weakest since May 31.
After lending euro-region banks a record 489 billion euros ($657 billion) in its first refinancing operation on Dec. 21, the Frankfurt-based ECB tomorrow will probably grant them another 470 billion euros this week, according a Bloomberg News survey.
Using the operations, banks can borrow from the ECB at around 1 percent and invest the proceeds in higher-yielding securities such as the 10-year Italian government bond, currently yielding 5.34 percent.
“If there is a large take up at the long-term refinancing operation, I would expect the euro to have some further gains, through the $1.35 area,” said Ian Stannard, head of European currency strategy at Morgan Stanley in London. “We think it will fall because we think a lot of the positive news is priced in. The global growth picture will start to deteriorate again, which could start to undermine the euro.”
Morgan Stanley forecasts the euro will decline to $1.27 by March 31 and to $1.15 by year-end, Stannard said.
The dollar and yen dropped against higher-yielding currencies. The greenback slid 0.8 percent against Norway’s krone, 0.5 percent versus the Mexican peso and 0.4 percent against the South Korean won.
The Dollar Index (DXY), which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, fell 0.2 percent to 78.393. The gauge slid to 78.22 on Feb. 24, the lowest since Dec. 8.
The S&P 500 Index rose 0.1 percent and the Stoxx Europe 600 Index of shares fell 0.1 percent.
The yen rose against the dollar and pared its losses against riskier currencies after a report showed orders for U.S. durable goods fell in January by the most in three years. The 4 percent drop exceeded a 1 percent decline forecast by economists in a Bloomberg News survey.
“It’s a surprise and it was much greater than expected,” said Carl Forcheski, a director on the corporate currency-sales desk at Societe Generale SA in New York. “It’s the first real bit of bad news that we’ve had in a while and it could trigger the correction that has been on the overdue side.”
The Conference Board’s U.S. consumer confidence index climbed to 63 this month from 61.1 in January, according to a Bloomberg News survey.
The dollar has weakened 3.8 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The yen is the worst performer, falling 8.6 percent, and the euro gained 0.1 percent.
The pound approached a three-week high against the dollar after the Confederation of British Industry said its retail sales gauge rose in February to the highest reading in eight months, boosting speculation the nation will avoid a recession.
The gauge increased to minus 2 from minus 22 the previous month, the London-based business lobby said in a report today. A measure of expected sales for next month was at 2, indicating retailers expect sales to improve in March, the report showed.
The pound rose 0.1 percent to $1.5844, after advancing to $1.5902 yesterday, the strongest level since Feb. 8. The U.K. currency weakened 0.1 percent to 84.77 pence per euro.
The U.K. currency has weakened 1.2 percent against the euro since Feb. 21, the day before Bank of England minutes showed two policy makers voted for a larger increase in asset purchases than agreed at this month’s meeting.
“The sell-off in sterling following the BOE minutes provides an opportunity to buy it against the euro,” Valentin Marinov and Greg Anderson, senior currency strategists at Citigroup Inc., wrote in a note to clients.
The strategists recommended investors buy the pound at 84.73 pence per euro, with a target of 82.50 and stop-loss orders at 85.55. A stop-loss is an instruction to exit a trade at a certain level in case a bet goes the wrong way.
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