Bloomberg News

Euro Falls as Wagers on Short-Term Rates Are Damped; Pound Drops

January 18, 2013

The euro fell versus the dollar after a European Central Bank official said the ECB doesn’t have a view whether banks should repay funds when the possibility comes up, damping bets short-term interest rates will rise.

The shared currency slid from almost the highest since February 2012 after ECB Executive Board member Benoit Coeure said he doesn’t expect repayments to affect the Eonia rate, an overnight interest rate for the interbank market. The yen and dollar rose versus most major peers, while sterling dropped after U.K. retail sales unexpectedly fell.

“The euro has been on a tear against the U.S. dollar since last week,” Ravi Bharadwaj, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co., said in a phone interview. “Investors across a broad spectrum of industries have been looking for a point of consolidation. Eonia and some of the recent news from the U.K. certainly gave them the necessary ammunition to engage in that pullback.”

The euro weakened 0.4 percent to $1.3321 at 5 p.m. New York time after appreciating on Jan. 14 to $1.3404, the strongest level since Feb. 29, 2012. It lost 0.2 percent this week. Europe’s shared currency declined 0.2 percent to 119.98 yen after reaching 120.71, the highest since May 2011.

The yen slipped 0.2 percent to 90.10 per dollar and reached 90.21, the strongest level since June 2010. The currency dropped 1 percent over the past five days in its 10th straight weekly loss versus the greenback, the longest stretch since 1989.

Peso Bets

Futures traders reversed their euro bets for a third straight week, wagering that the shared currency will strengthen against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop -- so-called net longs -- was 7,315 on Jan. 15 , compared with net shorts of 8,035 a week earlier and net longs of 5,126 the week before that.

Speculators increased their bets that the Mexican peso will gain against the U.S. dollar to the highest since at least 1995, when Bloomberg began tracking the data. The difference in the number of wagers by hedge funds and other large speculators on an advance in the peso compared with those on a drop was 151,665 on Jan. 15, compared with net longs of 139,523 a week earlier.

The peso weakened 0.6 percent today, its biggest drop on a closing basis since Dec. 21, to 12.6621 per dollar.

Issues Persist

European leaders have struggled for three years to deal with a sovereign-debt crisis that began in Greece and spread.

“We continue to remain short the euro because the continent is still dealing with its economic issues,” Krishna Memani, chief investment officer of fixed-income at OppenheimerFunds Inc. in New York, which oversees $75 billion, said in a telephone interview. A short position is a bet an asset will weaken.

Currency volatility rose to a five-month high, increasing the chance that price swings will wipe out profits. The JPMorgan G7 Volatility Index, based on three-month futures options on Group of Seven nations’ currencies, reached 9.19 percent, the most since Aug. 2.

The South African rand dropped against all 16 of its most- traded counterparts amid concern that labor protests in mining and agriculture will curb exports and slow growth in Africa’s largest economy. The currency weakened 0.9 percent to 8.8805 per dollar.

Pound Drops

The pound dropped after a 0.1 percent decline in retail sales last month added to signs the U.K.’s economy is struggling to recover. Sterling lost 0.8 percent to $1.5870 in its sixth straight daily decline, the longest losing streak since November. It declined 0.4 percent to 83.93 pence per euro and reached 83.87, the weakest level since March 13.

The European Banking Federation’s euro overnight index average, or Eonia, of unsecured lending deals was set at 0.068 percent yesterday, from 0.067 percent on Jan. 11. It touched 0.131 percent at the end of last year.

Yields on German government bonds declined. Two-year yields fell as much as three basis points, or 0.03 percentage point, to 0.17 percent after climbing earlier today to 0.24 percent, the highest level since April 2.

European bond yields surged yesterday amid speculation demand for funds to repay the ECB would drive up the cost of money and leave less available for short-term loans. Banks are able to being repaying loans taken from the central’s Longer- Term Refinancing Operation from the end of this month.

‘No Commitment’

“We’ve seen a lot of euro crosses, whether it’s euro-yen, euro-sterling, euro-Swiss, all bought up over the last three, four days,” Peter Gorra, chief dealer in New York at BNP Paribas SA, said in a telephone interview. “Now it seems with a simple comment like that, people have no commitment to these positions,” Gorra said of Coeure’s remark.

The euro has gained 3 percent this month against the Swiss franc. It has advanced 3.3 percent against the pound.

The franc slid against the euro early today after the trade union Unia called on the nation’s central bank to change its cap on the currency.

The currency touched the weakest level since the Swiss National Bank imposed the exchange-rate cap of 1.20 per euro in September 2011 after the franc surged to 1.008 in August. It depreciated as much as 0.8 percent today to 1.2569 per euro, the weakest since May 2011, before advancing 0.3 percent to 1.2445.

The Swiss currency has tumbled 1.7 percent this year among the 10 developed-market currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen dropped 3.7 percent, while the dollar rose 0.5 percent and the euro climbed 1.6 percent.

India’s rupee completed the best week since November, rising versus 31 major counterparts after the government allowed state refiners to adjust diesel prices, a move that may help rein in energy subsidies and narrow the budget deficit.

The rupee rose 2 percent this week to 53.7062 per dollar, the strongest level since Nov. 2, in Mumbai trading.

To contact the reporters on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net; 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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