Euro Advances a Third Day on Greek Bailout Progress; Dollar, Yen Decline
Monday, 20 February 2012 | 12:51
The euro rose against the dollar for a third day on speculation European finance ministers will settle their remaining differences over a Greek bailout when they meet later today.
The 17-nation currency also strengthened versus the yen and the British pound. The dollar dropped against most major peers on Chinese measures to sustain economic growth, damping demand for haven assets. The yen touched a six-month low against its U.S. counterpart as data showed Japan had its largest monthly trade deficit on record. Should ministers fail again to back the bailout at today’s Brussels meeting, the issue could be pushed to the next European Union summit on March 1.
“The prices suggest some degree of optimism that the ministers will be able to agree on something,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “If they reach a deal and Greece is able to avoid the outright default, the euro should be well supported in the near term.”
The euro appreciated 0.9 percent to $1.3256 at 11:19 a.m. London time. It advanced 0.9 percent to 105.47 yen after touching 105.75, the strongest since Nov. 14. The shared currency climbed 0.7 percent to 83.58 British pence.
The yen was little changed at 79.56 per dollar, after reaching 79.89, the weakest level since Aug. 4. The nation’s trade deficit widened to 1.48 trillion yen in January, the Ministry of Finance said today.
Greek Debt Deal
The so-called three-month risk reversal rate showed the premium for options granting the right to buy the dollar against the yen rose to 55.75 basis points today, the most since Bloomberg started compiling the data in 2003.
Euro-area finance ministers are set to meet in Brussels to seek agreement on a 130 billion-euro Greek bailout. Talks on Greece’s second aid package in two years will aim to reconcile demands made on Greek politicians, a debt swap among private creditors and the role of the European Central Bank.
European leaders including German Chancellor Angela Merkel want to wrest the common currency out of its crisis amid signs of improvement in the global economy. Focus has returned to Greece as the threat of economic collapse and exit from the euro has stoked officials’ concern such a scenario may provoke chaos. An agreement is crucial to fend off the region’s first sovereign default as Greece is due to pay off 14.5 billion euros of maturing debt on March 20.
“The market is cautiously optimistic in terms of what they expect out of Europe this week,” said Thomas Averill, managing director in Sydney at Rochford Capital, a currency and interest- rate risk-management company. “There will be support for the euro today.”
The euro gained even after futures traders increased their bets that the currency will decline against the dollar. The difference in the number of wagers by hedge funds and other large speculators on a drop in the euro compared with those on a gain was 148,641 on Feb. 14, compared with 140,593 a week earlier, according to the Washington-based Commodity Futures Trading Commission.
Still, the euro has slid 4.4 percent in the past three months, making it the second-worst performer among 10 developed- market currencies after the yen, according to Bloomberg Correlation-Weighted Indexes.
The yen dropped against all 16 of its major peers. A government report showed Japan’s exports fell in January as the currency traded near a record high and amid weaker global demand.
The trade deficit widened to 1.48 trillion yen and shipments dropped 9.3 percent from a year earlier, the Ministry of Finance said. The median estimate of economists surveyed by Bloomberg News was for a trade gap of 1.46 trillion yen and a 9.4 percent decline in exports.
“Once the yen starts weakening like it has in the past few days, we don’t know how far it may go,” said Kumiko Gervaise, an analyst in Tokyo at Gaitame.com Research Institute Ltd., a unit of Japan’s largest online currency margin-trading company.
Standard and Poor’s today affirmed Japan’s sovereign-debt rating at AA- while maintaining a negative outlook and warning that a downgrade is likely if medium-term growth prospects weaken.
The dollar declined against all but two of its major peers as the People’s Bank of China announced a cut to banks’ reserve requirements. The central bank move aims to support lending and sustain economic growth as the housing market cools and Europe’s sovereign-debt crisis weighs on exports.
The proportion of cash that lenders must set aside will fall half a percentage point from Feb. 24, the central bank said Feb. 18 on its website. Standard Chartered Plc forecasts at least three more reductions this year, while HSBC Holdings Plc sees a minimum of two.
“The market is probably expecting more easing” from China’s central bank, said Mike Jones, a foreign-exchange strategist at Bank of New Zealand in Wellington. “If we do get the Greek deal on top of that, it’s likely to provide an additional risk kicker.”
Implied volatility of three-month options of Group of Seven currencies was at 10.42 percent, according to the JPMorgan G7 Volatility Index, up from the 9.79 percent level on Feb. 10 that was the lowest since August 2008. 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 profit.