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Euro Strengthens After Greek Says Debt Talks Progressing; Dollar Declines

Tuesday, 31 January 2012 | 12:26
The euro strengthened against the dollar, snapping its biggest decline in two weeks, after Greek Prime Minister Lucas Papademos said progress had been made in debt-swap talks with bondholders.
The 17-nation currency climbed for the first time in four days versus the yen after European chiefs meeting in Brussels yesterday agreed to accelerate the introduction of a permanent 500 billion-euro ($659 billion) rescue fund and signed a deficit-control treaty. The dollar fell as stock gains damped demand for safer investments. The yen rose to a three-month high against the greenback, fueling speculation Japan’s government will take action to curb the currency’s advance.
“We’ve seen a bounce in the euro and the risk environment is looking a little a bit firmer,” said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London. “It doesn’t look as though we’ve ended up with a summit with a great degree of rancor, but I don’t think we’ve seen enough for the euro’s rally to be sustained for much longer.”
The euro gained 0.4 percent to $1.3193 at 10:07 a.m. London time after sliding 0.6 percent yesterday, the biggest decline since Jan. 13. The shared currency climbed 0.3 percent to 100.65 yen. The dollar dropped 0.1 percent to 76.27 yen after falling to 76.18 yen, the weakest level since Oct. 31.
The euro is headed for its first monthly advance since October versus the dollar and the yen. The shared currency has appreciated 1.8 percent against the greenback, and risen 1 percent versus the yen.
Greece ‘Committed’
Papademos said he’s “strongly committed” to reaching a debt-swap agreement with Greece’s creditors. Representatives of the European Commission, the European Central Bank and the International Monetary Fund want more fiscal tightening and wage cuts from Greece, the prime minister told reporters after the European Union meeting.
“The summit will likely be viewed as a success relative to modest expectations, and this eliminates some event risk for the euro system,” Peter Von Maydell, head of currency strategy at Credit Suisse Securities in London, wrote in a note to clients. “However, markets have likely largely priced in a successful outcome already given the rallies in the last week.”
The cost to protect against a drop in the euro against the dollar fell from a three-week high. Risk-reversal rates for three-month options on the euro versus the dollar shrank to negative 1.85 today from negative 1.86 yesterday, the most since Jan. 9. The measure reached negative 4.4 percent in November.
Volatility
Implied volatility of three-month options of Group of Seven currencies dropped to 10.53 percent, from as high as 10.61 percent yesterday, according to the JPMorgan G7 Volatility Index (JPMVXYG7). A decrease makes investments in currencies with higher benchmark lending rates more attractive as the risk in such trades is that market moves will erase profits.
The dollar weakened as the Stoxx Europe 600 Index (SXXP) of shares gained 0.8 percent, and futures on the Standard & Poor’s 500 Index (SXXP) advanced 0.5 percent.
The Dollar Index (DXY), which IntercontinentalExchange Inc. uses to track the currency against those of six U.S. trading partners, fell 0.4 percent to 78.84.
Higher-yielding currencies rose the most against the greenback. The New Zealand dollar advanced 1.2 percent to 82.86 U.S. cents, Australia’s currency climbed 0.7 percent to $1.0669, and South Africa’s rand gained 0.8 percent to 7.7781 per dollar.
‘Very Dovish’
The greenback has weakened against all its 16 major counterparts this month as the Federal Reserve extended its pledge last week to keep interest rates low through at least late 2014. Chairman Ben S. Bernanke signaled on Jan. 25 the central bank is considering a third round of asset purchases, or quantitative easing, to spur growth.
“The market is still digesting the very dovish policy statement released by the Fed,” said Audrey Childe-Freeman, global head of currency strategy at JPMorgan Private Bank in London. “The Fed policy context is bringing fresh ammunition to dollar bears.”
Japan refrained from selling yen in the foreign-exchange market this month, the Ministry of Finance said today on its website. The nation sold the currency on Oct. 31 when it climbed to a postwar record of 75.35 per dollar.
Japan’s Finance Minister Jun Azumi said his ministry is prepared to take “decisive” measures to curb the yen’s appreciation as it approached a post-World War II high.
India’s rupee extended a record monthly gain as overseas funds increased purchases of the nation’s assets after the currency slumped 16 percent last year.
The rupee advanced 0.8 percent to 49.3875, having gained 6.9 percent this month, the most since at least February 1973, according to data compiled by Bloomberg.
-- With assistance from Jeanette Rodrigues in Mumbai and Masaki Kondo in Singapore. Editors: Nicholas Reynolds, Matthew Brown
Source: Bloomberg
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