Monday, 23 January 2012

Euro Advances to Three-Week High Against Dollar Before EU Talks

Jan. 23 (Bloomberg) -- The euro strengthened to an almost three-week high against the dollar as French Finance Minister Francois Baroin said negotiations between Greece and its private creditors are making "tangible progress."

The 17-nation currency gained versus 13 of its 16 major counterparts tracked by Bloomberg as European Union finance ministers gather in Brussels to discuss a Greek debt swap, budget rules and a financial firewall to protect indebted nations. The Australian and New Zealand dollars gained as the implied volatility of major currencies reached the lowest in almost a year and commodities and equities rallied.

"The price action is putting the cart before the horse by assuming that since risky currencies and the euro are rallying that something is going to get done in Europe," said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp. "There has been quite a sea-change in the past couple weeks in terms of market sentiment and risk appetite and those that were talking about the euro going to parity are eating their words."

The euro gained 0.8 percent to $1.3034 at 12:01 p.m. New York time after rising to $1.3053, the highest level since Jan. 4. The common currency advanced 0.6 percent to 100.26 yen, while the dollar was little changed at 76.92 yen.

Volatility Slows

Implied volatility of three-month options of Group of Seven currencies declined to 10.6 percent, the least since March 2011, when it dropped to lowest since August 2008, according to the JPMorgan G7 Volatility Index. The decline makes investments in currencies with higher benchmark lending rates more attractive as the risk in such trades is that market moves will erase profits.

Australia's dollar gained 0.5 percent to $1.0534, and New Zealand's currency advanced 0.6 percent to 81.08 cents. Interest rates are 4.25 percent and 2.5 percent respectively, compared with near zero rates in the U.S. and Japan.

The dollar and yen fell against all their major counterparts excluding the Taiwanese dollar as stocks and commodities rallied. The Standard & Poor's 500 Index gained as much as 0.5 percent and the S&P GSCI index of 24 raw materials rose 0.7 percent.

The dollar has weakened 1.6 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The yen declined 0.1 percent, and the euro has slipped 1.7 percent.

Canada's dollar appreciated to within a cent of parity with the U.S. currency as leading economic indicators increased for a sixth month in December, according to Statistics Canada. The loonie gained 0.5 percent to C$1.0079 per U.S. dollar. It has not traded above parity since Nov. 1.

Euro Bets

Investors betting against the euro since the European Central Bank cut rates in November may be benefiting from the most profitable trade in the foreign-exchange market, according to data compiled by Bloomberg.

Borrowing in euros and investing in the currencies of Australia, Brazil, Mexico, South Africa and South Korea has returned 7.8 percent since the ECB cut its benchmark interest rate on Nov. 3 for the first time in more than two years, Bloomberg data shows. So-called carry trades funded with yen have lost 0.1 percent and gained 1.5 percent when financed with dollars.

Futures traders last week raised bets to a record that the euro will decline against the dollar. The difference between wagers that the shared currency will fall versus those that it will rise -- so-called net shorts -- surged to 160,030 in the week ended Jan. 17, data from the Commodity Futures Trading Commission showed on Jan. 20.

The pound fell 0.8 percent to 83.66 pence per euro after profit alerts increased by more than 70 percent in the final quarter of 2011 at U.K.-listed companies, the biggest jump since the first three months of 2001, according to Ernst & Young LLP.

Greek Talks

Bondholders negotiating a debt swap with Greece have made their "maximum" offer, leaving it to the EU and International Monetary Fund to decide whether to accept the deal, said Charles Dallara, managing director of the Washington-based Institute of International Finance, who's representing private creditors in the talks.

The parties were nearing an agreement under which old bonds would be swapped for new securities, with coupons averaging between 4 percent and 4.5 percent, according to a person with knowledge of the discussions three days ago. Germany and the IMF are now insisting on an agreement closer to 3 percent, the New York Times cited officials involved as saying.

The German government is considering proposals to run the temporary and permanent European rescue funds in parallel if needed, potentially creating a bigger firewall against the region's debt crisis, according to Steffen Seibert, the government's chief spokesman.

European Union leaders will discuss the proposals at a Jan. 30 summit in Brussels, he said.

Running the two funds simultaneously "has been suggested on many occasions in the past," said Chris Walker, a currency strategist at UBS AG in London. "It would effectively create a much bigger firewall if it happened but there are of course many problems; increased guarantees and potential German constitutional court challenges."

--With assistance from Paul Dobson and Anchalee Worrachate in London. Editors: Paul Cox, Dave Liedtka

To contact the reporters on this story: Allison Bennett in New York at
David Goodman in London at
To contact the editor responsible for this story: Dave Liedtka at