Monday, 9 January 2012

Euro Snaps 3-Day Drop Versus Dollar After Merkel, Sarkozy Meet

Jan. 9 (Bloomberg) -- The euro snapped a three-day slide against the dollar as the leaders of Germany and France met to craft a plan for rescuing the 17-nation common currency.

The Swiss franc climbed on bets central-bank Chairman Philipp Hildebrand's resignation threatens the nation's currency ceiling. The euro pared gains after the talks between German Chancellor Angela Merkel and French President Nicolas Sarkozy. New Zealand's dollar and Brazil's real were the top performers versus the dollar as investors sought riskier assets. U.S. retail sales rose last month, data this week may show.

"This meeting was just setting up for the finance-minister meeting later this month," said Mark McCormick, a New York- based currency strategist at Brown Brothers Harriman & Co. "We have a little tug of war between better macro data in the United States and policy developments in the euro zone."

The shared currency advanced 0.1 percent to $1.2728 at 11:12 a.m. New York time, after earlier falling to $1.2666, its weakest level since Sept. 10, 2010. The euro was little changed at 97.84 yen after dropping earlier to 97.28, the least since December 2000. The dollar fell 0.1 percent to 76.89 yen.

The euro is unlikely to rise over $1.28 this week, McCormick said.

Futures traders increased their bets to a record high that the euro will decline against the dollar. The difference between wagers that the shared currency would fall versus those that it would rise -- so-called net shorts -- surged to 138,909 in the week ended Jan. 3, according to data from the Commodity Futures Trading Commission released Jan. 6.

'Very Stretched'

The euro is rising today as traders purchase the shared currency to close short positions, rather than on optimism about the Merkel-Sarkozy meeting, according to Adam Cole, head of global currency strategy at Royal Bank of Canada's RBC Europe unit in London.

"It's more to do with very stretched positioning than anything else," Cole said.

The shared currency will decline to $1.27 by the second quarter, according to the median forecast of analysts surveyed by Bloomberg. That's down from a previous estimate of $1.28.

Merkel welcomed progress on talks on the fiscal pact at a joint press conference with Sarkozy after their meeting and said there was "very close agreement" between their two countries. She said euro-area leaders will discuss making the European bailout fund "more efficient" and that Germany and France "are ready to examine" how to speed up capital payments into the European Stability Mechanism bailout fund.

Today's meeting will be followed by a round of talks among euro-area leaders before the next summit in Brussels on Jan. 30. Italian Prime Minister Mario Monti also will visit Berlin this week, and Sarkozy and Merkel will both travel to Rome on Jan. 20 for negotiations with the Italian government.

Hildebrand Resigns

The franc rose to the strongest since September against the euro after the nation's central bank president quit. Philipp Hildebrand stepped down after a currency transaction by his wife last year dented his credibility.

The central bank said in a statement its cap of 1.20 francs per euro "remains unchanged." It imposed the ceiling on Sept. 6 to halt the currency's advance as Europe's debt crisis fueled demand for the relative safety of Swiss assets.

The franc gained 0.1 percent to 1.2138 per euro after touching $1.2108 earlier, the strongest since Sept. 20. It gained 0.2 percent to 95.32 centimes per dollar.

The dollar gained 0.6 percent over the past week, the third-best performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes.

Dollar Index

IntercontinentalExchange Inc.'s Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, slipped 0.1 percent today to 81.179.

Bets on dollar strength have reached "extreme" territory for the first time since March 2010, according to Morgan Stanley, citing an aggregate measure including client flow data and market futures positions.

Buying of the U.S. currency last week by Morgan Stanley's clients reached the 85th percentile of the past two years, Calvin Tse, a London-based currency strategist at the company, said in an interview.

The most accurate foreign-exchange forecasters say the euro will depreciate against the dollar for a third straight year, equaling its longest slump since its creation in 1999, as Europe slips into recession.

Wells Fargo, Westpac

Nick Bennenbroek, the head of currency strategy at Wells Fargo & Co., who topped the list for the third time in five quarters as measured by Bloomberg Rankings, said the euro may drop in the first six months to $1.24, from $1.2961 at the end of 2011. Westpac Banking Corp., which has had the second-lowest margin of error for two consecutive surveys, predicted $1.20.

U.S. retail sales increased 0.3 percent in December, compared with a 0.2 percent advance the previous month, economists in a Bloomberg News survey forecast before the government releases the data Jan. 12.

"The correlation between good U.S. data equaling a weak dollar is beginning to break down now that we're seeing signs of a more sustained recovery in the U.S.," said Mike Jones, a currency strategist at Bank of New Zealand in Wellington. "There's a clear fundamental shift in favor of the U.S. dollar."

New Zealand's dollar rose 0.5 percent to 78.46 U.S. cents and gained 0.4 percent to 60.31 yen. Brazil's real appreciated 0.7 percent to 1.8434 per dollar.

The Standard & Poor's 500 Index rose as much as 0.3 percent before trading little changed.

--With assistance from Kristine Aquino in Singapore, Matthias Wabl in Zurich, Catarina Saraiva in New York and Chris Fournier in Halifax, Nova Scotia. Editors: Greg Storey, Paul Cox

To contact the reporter on this story: Allison Bennett in New York at
Keith Jenkins in London at

To contact the editor responsible for this story: Dave Liedtka at