Euro Has Biggest Weekly Gain Since May 2009 as European Debt Concern Eases
Wednesday, June 23rd, 2010
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The Euro sign sculpture sits outside the European Central Bank (ECB) headquarters in Frankfurt. Photographer: Hannelore Foerster/Bloomberg
The euro rose the most this week against the greenback in more than year as an easing in concern over Europe’s debt crisis spurred traders to end bets the shared shared currency would decline.
The euro appreciated for a second week versus the yen, the first back-to-back weekly gains since March, as increased demand at a Spanish bond sale and an agreement by European Union leaders to disclose how banks perform on stress tests damped investor worries about the region’s financial system. The dollar fell versus the yen as Japan’s ruling party announced a deficit- cutting plan and disappointing U.S. data increased speculation the Federal Reserve would keep interest rates at a record low.
“The recent news out of Europe is reassuring,” said Camilla Sutton, a Bank of Nova Scotia currency strategist in Toronto. “Europe will release the results of stress tests and give the market the clarity it looked for. The U.S. will be on hold for longer. That helped equities and boosted risk appetite.”
The euro rose 2.3 percent to $1.2388 this week, the biggest gain since the five days ended May 22, 2020, from $1.2112 on June 11. It touched $1.2417 yesterday, the highest level since May 28. Europe’s common currency rose 1.3 percent to 112.40 yen, from 111 on June 11. The dollar fell 1 percent to 90.71 yen, from 91.65 a week ago.
The common currency gained as futures traders decreased their bets that the currency will decline against the U.S. dollar to the lowest level since April, figures from the Washington-based Commodity Futures Trading Commission show.
Short Covering
The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain — so-called net shorts — was 62,360 on June 15, after dropping 44 percent from 111,945 a week earlier.
“Seventy percent of the euro’s gain was short covering,” said Brian Dolan, chief strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. “The downside had become extreme, and sentiment was extreme. It’s slow going on the way up. I think we’ll see losses developing faster than recoveries.”
Spain sold 3 billion euros ($3.7 billion) of 10-year debt on June 17 at an average yield of 4.864 percent, less than the 5.04 percent that the bonds traded at before the sale. Demand was 1.89 times the amount on offer. It also sold 479.2 million euros of 30-year debt at 5.908 percent, and the bid-to-cover ratio was 2.45, higher than the 1.38 at the previous sale on March 18.
‘Cloud of Suspicion’
“We had the credit markets more or less stabilize,” said Boris Schlossberg, director of research at online currency trader GFT Forex in New York. “That’s why the euro continues to perform well.”
European Union leaders this week agreed to disclose how banks perform on stress tests, seeking to show investors the financial system can withstand financial shocks.
French Finance Minister Christine Lagarde yesterday said a European Union decision to publish the results of stress tests will “clear a cloud of suspicion that’s out there.” She made the comments while attending the St. Petersburg Forum in Russia.
The pound gained this week the most versus the greenback since the week of April 2 before of the U.K.’s announcement of budget cuts on June 22, which may help it avoid the rising bond yields afflicting Spain and Portugal.
‘Investor Enthusiasm’
Chancellor of the Exchequer George Osborne is set to outline the deepest spending cuts since at least the 1970s to tame a budget deficit of 11 percent of gross domestic product last fiscal year. U.K. government bond yields have fallen 0.339 percentage point since Prime Minister David Cameron took office six weeks ago on expectations his coalition government will step up the pace of deficit reduction.
The pound climbed 1.9 percent to $1.4824 this week from $1.4552 on June 11. It fell 0.4 percent to 83.59 pence per euro.
The yen posted a second weekly gain versus the dollar after Japanese Prime Minister Naoto Kan pledged to cut the world’s largest public debt. Kan said he’d consider an opposition party proposal to raise the consumption tax.
BNY Mellon is “seeing net buying of the Japanese yen, not so much as a risk aversion play, but because of investor enthusiasm about Japan’s ruling party announcing a new plan to combat deflation, reduce the budget deficit and restore growth,” Samarjit Shankar, a managing director for the foreign- exchange group in Boston, wrote in a note to clients. BNY Mellon is the world’s largest custodial bank, with more than $20 trillion in assets under administration.
‘Likely to Decelerate’
The greenback fell against all 16 major currencies this week after the number of American’s filing for jobless benefits for the first time rose, increasing speculation that economic growth in the U.S. remains fragile.
Initial jobless claims in the U.S. increased by 12,000 to 472,000 in the week ended June 12, according to Labor Department figures. Economists surveyed by Bloomberg News projected 450,000 claims, according to the median forecast.
Futures trading on the CME Group Inc. exchange showed a 36 percent chance that the Fed will raise its target rate for overnight bank lending by at least a quarter-percentage point by its January meeting, down from 55 percent odds one month ago.
The U.S. economy will stagnate in the second half of the year as households, businesses and state and local governments trim debt, according to John Herrmann of State Street Global Markets in Boston.
“There is an incredible amount of deleveraging going on in the economy,” Herrmann, a senior fixed-income strategy, said in an interview June 17 on Bloomberg Radio with Tom Keene. “Organic growth in the economy is likely to decelerate” as government stimulus fades and temporary census workers complete their contracts, he said.
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