Bloomberg News

Euro Gains as Central Bank Action Speculation Increases

June 06, 2012

Euro Holds Drop Before ECB Meeting

Foreign currency exchange rates are displayed on a board outside a currency exchange store in Rome, Italy. Photographer: Alessia Pierdomenico/Bloomberg

The euro gained the most in almost three months against the dollar as European Central Bank President Mario Draghi said policy makers were “ready to act” after leaving their benchmark rate at a record low.

The Dollar Index fell to its lowest level in more than a week as investors bet Federal Reserve Vice Chairman Janet L. Yellen and Chairman Ben S. Bernanke would signal increased need for stimulus in appearances today and tomorrow. The yen fell against all its major counterparts amid reduced demand for safer assets. Australia’s dollar rose as the nation’s economic growth exceeded forecasts and investors sought higher-yielding currencies.

“Everyone is anticipating some kind of action from policy makers, hopefully before the G-20 meeting June 18,” said Kathy Lien, director of foreign-exchange research at online-currency trader GFT Forex, in New York. “On the more near-term basis, people are positioning for quite dovish comments from Bernanke tomorrow. There is quite a possibility that the Fed could ease before the ECB, and if he gives us that indication, that could lead to more of a short-squeeze in the euro-dollar.”

The euro strengthened 1 percent to $1.2582 at 5 p.m. in New York, in the biggest daily increase since March 8. The shared currency climbed 1.6 percent to 99.63 yen. The yen dropped 0.6 percent to 79.19 per dollar.

“We have a ton of short positions in euro, so when we cleared through the $1.2550 level, which was a strong level of resistance, we pushed higher,” Lien said.

Bets the shared currency will decline, or net-shorts, against the dollar reached a record in the week ended May 29.

Dollar Falls

The Dollar Index (DXY) fell 0.8 percent to 82.180 as yields on benchmark Treasury 10-year notes rose as demand for the safety of U.S. debt declined. The gauge, which tracks the greenback against the currencies of six major trading partners, touched 82.125, the lowest since May 29. It is weighted 57.6 percent to movements in the euro.

The 10-year U.S. note yield rose nine basis points, or 0.09 percentage point, to 1.66 percent.

Yellen is scheduled to speak on the economic outlook in Boston at 8 p.m. New York time. Bernanke will testify to U.S. lawmakers in Washington tomorrow. The Fed said today in its Beige Book business survey that the U.S. economy maintained a moderate pace of growth as factory output rose and the real- estate market improved.

“The sense is that investors have woken up and looked at their short risk positions and said we have Yellen and Bernanke in the next 24 hours,” said Steven Englander, head of Group of 10 currency strategy in New York at Citigroup Inc. “If Yellen reverts to her dovishness, the market will take it has a very positive sign for risk and the dollar risk off currency.”

Australia GDP

Atlanta Fed President Dennis Lockhart said today that an extension of the central bank’s Operation Twist program to reduce borrowing costs is “on the table” following data that showed job growth in May was the weakest in a year.

Australia’s dollar appreciated versus all of its major counterparts but it’s New Zealand counterpart after a report showed gross domestic product grew twice as fast as economists forecast. The Aussie gained 1.9 percent to 99.27 U.S. cents.

“If Australia has good GDP data people think that means something about East Asia and specifically China,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. “What’s going on is not so much risk-on but reducing risk averseness. The euro is still lagging in this risk on move.”

Technical Resistance

There is technical resistance to further Australian dollar appreciation at 99.37 U.S. cents, Niall O’Connor, a New York- based technical analyst with JPMorgan Chase & Co. wrote to clients. The level represents the 38.2 percent Fibonacci retracement level from the April high of $1.0474. A failure to break this level leaves the Aussie vulnerable to a decline to 93.88 U.S. cents, O’Connor wrote.

New Zealand’s dollar surged after the world’s largest dairy exporter said auction prices for whole-milk powder climbed for the first time this year. The kiwi rose 1.9 percent to 77.08 U.S. cents.

Canada’s dollar appreciated for a third day versus its U.S. counterpart, the longest streak since April. The so-called loonie rose 1 percent to C$1.0276 per U.S. dollar.

The currency was also buoyed before a report a Bloomberg survey predicts will say on June 8 the nation’s employers added 5,000 jobs last month and crude oil, its largest export, rose for a third day, gaining 1.5 percent to $85.55 a barrel in New York.

The Standard & Poor’s 500 Index rose 2.3 percent. The S&P GSCI Index of 24 raw materials rose 1.3 percent.

Unlimited Cash

The ECB’s Draghi said during a press conference in Frankfurt that officials will extend their offerings of unlimited cash to banks until the start of 2013 for periods up to three months as they endeavor to counter risks stemming from the region’s debt crisis.

The ECB’s decision to keep its benchmark rate unchanged was predicted by 49 of 60 economists surveyed by Bloomberg News. Ten forecast a quarter-point reduction, and one a half-point cut.

The shared currency has fallen 3.3 percent during the past six months, the worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar gained 3.8 percent, and the yen advanced 1.6 percent.

“The market is starting to anticipate what action we could see from policy makers,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “We’re starting to see the safe-haven currencies of the dollar and the yen give back some of their strong recent gains. It’s more hope than anything that is driving the more favorable market dynamics” for the euro.

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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