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Euro Advances Versus Dollar on ECB Rate Bets, Greek Austerity

July 01, 2011

July 1 (Bloomberg) -- The euro advanced versus the dollar for a fifth day as traders increased bets the European Central Bank will tighten monetary policy and Greece progressed in staving off a default.

The euro headed for a weekly advance against 12 of its 16 major peers after Greek Prime Minister George Papandreou won approval to implement an austerity plan needed to keep aid flowing to his nation. The Dollar Index was was set for its biggest weekly decline since January before a report forecast to show U.S. manufacturing growth slowed in May. The New Zealand dollar weakened on dimmer prospects for exports after a Chinese manufacturing index fell.

“The short-term event risk has clearly decreased with Greece having passed its laws and the European banks indicating they are participating in private sector involvement,” said Ulrich Leuchtmann, head of foreign-exchange strategy at Commerzbank AG in Frankfurt. “The euro-zone debt crisis has not had such a significant impact on the euro this year as last year because the ECB is conducting an interest rate policy that is completely independent of what’s going on in Greece, Portugal, Ireland, whatever.”

The euro rose 0.1 percent to $1.4521 as of 8:47 a.m. in London, set for a 2.4 percent weekly advance, its biggest gain since the five days ending Jan. 14. The European currency climbed 0.4 percent to 117.25 yen. The dollar rose 0.1 percent to 80.67 yen. New Zealand’s currency slid 0.3 percent to 82.67 U.S. cents.

Europe’s central bank will add 73 basis points to its benchmark interest rate in the next 12 months, a Credit Suisse Group AG index based on swaps showed. That compares with 16 basis points on June 22.

‘Strong Vigilance’

ECB President Jean-Claude Trichet reiterated yesterday that policy makers are in a state of “strong vigilance” against inflation, highlighting chances of a rate increase at their meeting on July 7. The central bank raised its key rate in April for the first time in almost three years, lifting it by a quarter point to 1.25 percent.

Papandreou won a vote to implement a 78 billion-euro ($113 billion) package of tax increases and asset sales, a condition of receiving further aid. The premier is seeking an “acceleration of the absorption” of planned aid funds in order to help the Greek economy exit from recession, an e-mailed statement of a letter he wrote yesterday to European Commission President Jose Manuel Barroso showed.

Dollar Index

The Dollar Index, which InterContinentalExchange Inc. uses to track the greenback against the currencies of six major trading partners, was little changed at 74.34, 1.8 percent lower in the week.

The Institute for Supply Management’s manufacturing index fell to 52 last month, the lowest level since August 2009, from 53.5 in May, according to the median estimate of 77 economists surveyed by Bloomberg News. Figures greater than 50 signal expansion. Another report may show dimmer job prospects and pricier goods weighed on consumer sentiment in June.

The so-called kiwi fell for the first time in four days versus the dollar after data showed Chinese manufacturing expanded in June by less than economists had estimated, sapping demand for higher-yielding assets.

China Data

“The China numbers were a bit weaker than expected and that fits with the trend we’ve seen in data out of Asia recently,” said Todd Elmer, head of Group of 10 currency strategy for Asia ex-Japan at Citigroup Inc. in Singapore. “This worsening in the outlook is a pretty clear negative signal for risky assets and risky currencies.”

The yen was headed for a weekly decline against 15 of its 16 major counterparts tracked by Bloomberg on prospects the Bank of Japan will lag behind its counterparts in raising interest rates as it struggles to lift the economy out of recession.

The quarterly Tankan index of sentiment at large manufacturers fell to minus 9 in June from 6 in March, the BOJ said in Tokyo today. The median estimate of economists surveyed by Bloomberg News was for a reading of minus 7. A negative number means pessimists outnumber optimists.

“The bias is for the yen to fall from the perspective of monetary policy,” said Koji Fukaya, chief currency strategist at Credit Suisse Group AG in Tokyo. “Policy in Japan should be accommodative.”

Ten-year Treasuries yielded 2.02 percentage points more than similar-maturity Japanese debt yesterday, the most since May 18. Once improvement in the U.S. economy becomes clear, U.S. Treasury yields will rise, helping weaken the yen, Fukaya said.

--With assistance from Masaki Kondo in Singapore, Monami Yui in Tokyo and Candice Zachariahs in Sydney. Editors: Matthew Brown, Keith Campbell

To contact the reporters on this story: Lucy Meakin in London at; Kristine Aquino in Singapore at

To contact the editor responsible for this story: Daniel Tilles at

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