Bloomberg News

Euro Pares Losses as European Leaders Agree to Stimulus

June 28, 2012

The euro pared losses against the dollar after the European Union agreed to spend 120 billion euros ($149 billion) to stimulate growth and create jobs.

The shared currency still closed down against the greenback for a fourth day and reached a three-week low versus the yen as investors speculated that any measures agreed on during a two- day summit in Brussels will fail to resolve the region’s debt crisis. Brazil’s real briefly erased a loss after the central bank said it will offer currency swap contracts at an auction tomorrow.

“The summit is unlikely to come up with any fantastic move forward,” Paul Robinson, London-based global head of foreign- exchange research at Barclays Plc, said in a conference call said before the stimulus agreement. “What we’re likely to see is further capital outflows from the euro area to other European and non-European currencies.”

The euro dropped 0.2 percent to $1.2444 at 5 p.m. New York time. The 17-nation currency depreciated 0.5 percent to 98.87 yen after touching 98.33 yen, the lowest since June 6. The dollar weakened 0.3 percent to 79.46 yen as Japan’s currency strengthened against all but one of its 16 major counterparts as a decline in stocks boosted demand for safer investments.

The Dollar Index (DXY) gained for a second day as U.S. jobless claims decreased by 6,000 to 386,000 in the week ended June 23, in line with the median forecast of economists surveyed by Bloomberg News. The index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, rose 0.1 percent to 82.721.

Riskless Ranking

The dollar has strengthened against 12 of its 16 most- traded counterparts this year, with the euro declining 4 percent and the yen falling 3.2 percent. Brazil’s real has dropped the most, at 10.2 percent, while the Mexican peso leads gainers with a 2.4 percent rise.

The euro’s risk-adjusted loss of 0.44 percent against the dollar this year is the most out of the 16 major currencies, the Bloomberg Riskless Ranking shows. The euro is also last with a loss of 3.8 percent on a straight return basis.

Brazil’s real posted a risk-adjusted gain of 0.85 percent versus the greenback to lead gainers, the data show, while the yen’s risk-adjusted gain of 0.44 percent is third best.

The risk-adjusted return, which isn’t annualized, is calculated by dividing total return by volatility, or the degree of daily price variation, giving a measure of income per unit of risk. A higher volatility means the price of an asset can swing dramatically in a short period, increasing the potential for unexpected losses.

Brazil Swaps

Brazil’s central bank said it will offer as many as 60,000 currency swap contracts tomorrow from 10:15 a.m. to 10:30 a.m. local time, according to a statement distributed by the bank. The currency dropped 0.1 percent to 2.0778 per dollar after declining as much as 1.1 percent.

Mexico’s peso, the Canadian dollar and Colombia’s peso all declined on slowing-growth concern amid the European turmoil.

“There’s some pessimism going into this summit,” Michael Woolfolk, a senior currency strategist at Bank of New York Mellon Corp. (BK:US), said in a telephone interview. “Economic conditions in Europe, particularly in Germany, continue to deteriorate. We’re going into this very long dollar and yen expecting maybe a modest euro bounce after the conference.” A long position is a bet the value of an asset will increase.

EU Blueprint

EU leaders gather tomorrow for the second day of the 19th summit on the region’s debt crisis. They are due to discuss a plan seen playing out over more than a decade for closer European integration. The blueprint, written by European Council President Herman Van Rompuy, centers on common banking supervision and deposit insurance, along with a “criteria-based and phased” move toward joint debt issuance.

“The market expects very little from the summit,” said Jesper Bargmann, regional head of spot trading for major currencies in Singapore at Royal Bank of Scotland Group Plc. “Whatever the outcome, I think euro is a sell.”

An International Monetary Fund team will start negotiations on potential changes to an international Greek loan after a fact-finding team travels to Athens “early next week,” a fund spokesman said.

While economic growth in Germany, Europe’s largest economy, may accelerate to 1.3 percent in 2013, heightened uncertainty about the debt crisis will weigh on growth in the middle part of this year, Munich-based Ifo said today. Ifo forecast expansion of 0.7 percent for 2012.

The number of people out of work in Germany rose a seasonally adjusted 7,000 to 2.88 million, the Nuremberg-based Federal Labor Agency said today. Economists had forecast an increase of 3,000, the median of 30 estimates in a Bloomberg News survey showed.

Italian Auction

Funds are flowing into banks in Germany, the only euro-area country with a stable outlook on its AAA rating, at record levels. Deposits in Germany rose 4.4 percent to 2.17 trillion euros ($2.72 trillion) as of April 30 from a year earlier, according to ECB figures. Deposits in Spain, Greece and Ireland shrank 6.5 percent to 1.2 trillion euros in the same period, including a 16 percent drop for Greece, the data compiled by Bloomberg show.

Italy sold 5.42 billion euros of five- and 10-year bonds, versus a maximum 5.5 billion-euro target for the sale. The Treasury priced the 10-year debt to yield 6.19 percent, up from 6.03 percent at the previous auction on May 30. The five-year bond yielded 5.84 percent, compared with 5.66 percent last month.

The nation’s 10-year yields climbed to a five-month high of 6.34 percent on June 14, approaching the 7 percent level that spurred Greece, Ireland and Portugal to seek bailouts.

‘Unfinished Business’

The euro has lost 3.1 percent in the past three months, the biggest drop among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen was the best performer with a 8.8 percent jump, followed by a 4.4 percent increase in the dollar.

“You can talk about unfinished business at the EU summit, but things could take years to solve and the markets haven’t got that long,” said Chris Turner, head of foreign-exchange strategy at ING Groep NV in London. “The euro is going to take the strain and peripheral debt will remain under pressure.”

ING forecasts the euro will fall to $1.22 in the next month, Turner said.

Mexico’s peso declined against the dollar, falling from a six-week high as an index of executive and consumer sentiment in the 17-nation euro area dropped to 89.9 from a revised 90.5 in May, the European Commission in Brussels said today. That’s the lowest since October 2009. The currency dropped 0.4 percent to 13.6163 per dollar after falling as much as 1.2 percent, its biggest drop in a week.

Loonie, Peso

The Canadian dollar is poised for the biggest drop versus major currencies in almost a year on speculation that slowing worldwide growth will crimp demand for the nation’s raw materials and prevent its central bank from raising interest rates. The so-called loonie depreciated 0.8 percent to C$1.0332 after touching C$1.0363, its weakest point since June 6.

Colombia’s peso fell after President Juan Manuel Santos asked the central bank to take “more aggressive” action to weaken the currency and as concern Europe’s debt crisis is getting worse sapped demand for higher-yielding, emerging-market assets. The currency slid 0.6 percent to 1,806.50 per dollar.

To contact the reporter on this story: Joseph Ciolli in New York at jciolli@bloomberg.net

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


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