Euro Approaches Seven-Month High After Merkel Win; Aussie Gains

By Kristine Aquino & Lucy Meakin - Sep 23, 2013 11:28 AM GMT+0400

The euro approached a seven-month high versus the dollar after Germany’s voters put Angela Merkel on course for the biggest election win since Helmut Kohl’s 1990 post-reunification victory.

The U.S. currency fell against the yen as markets assess when the Federal Reserve will reduce the pace of its bond purchases. Federal Open Market Committee voting member William C. Dudley is scheduled to speak today following comments from Bank of St. Louis President James Bullard indicating an October move is possible. Australia’s dollar rose after a gauge of Chinese manufacturing was stronger than analysts had forecast.

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Currency symbols for the Euro and U.S. dollar sit on a board outside a foreign exchange dealers in London. The euro had strengthened 2.5 percent this year against the greenback and 17 percent versus the yen. Photographer: Simon Dawson/Bloomberg

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Sept. 23 (Bloomberg) -- Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce, talks about the outlook for the euro versus the dollar. He spoke Sept. 20 in London. (Source: Bloomberg)

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Sept. 23 (Bloomberg) -- Robert Rennie, the chief currency strategist at Westpac Banking Corp., talks about global currencies. He speaks from Sydney with Zeb Eckert on Bloomberg Television's "First Up." (Source: Bloomberg)

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German Chancellor Angela Merkel, party leader of the Christian Democratic Union, casts her vote in the elections at a polling station in Berlin, on Sept. 22, 2013. Photographer: Krisztian Bocsi/Bloomberg

“This is a vote in favor of Merkel rather than a vote in favor of big changes,” said Steven Englander, Citigroup Inc.’s global head of G-10 currency strategy in New York. “It’s most likely Merkel will govern in a grand coalition with the Social Democrats, so that’s a slight euro positive because the government would be somewhat more friendly to the peripheral nations in the currency bloc.”

The euro rose 0.1 percent to $1.3539 at 8:27 a.m. in London after rising to $1.3569 on Sept. 19, the highest since Feb. 7. It slipped 0.3 percent to 134 yen. The dollar weakened 0.4 percent to 98.98 yen.

The euro has strengthened 2.6 percent this year against the greenback and 17 percent versus the yen. Japanese markets are closed today for a national holiday.

Lacking Majority

The Bloomberg U.S. Dollar Index, which tracks the greenback against 10 major currencies, slipped 0.2 percent to 1,011.56, after tumbling 1 percent last week.

Merkel’s Christian Democratic bloc took 41.5 percent of the vote in yesterday’s election, versus 25.7 percent for the Social Democrats of Peer Steinbrueck, according to results from all 299 districts. That leaves her short of a majority and party leaders are due to meet today to discuss coalition talks.

Merkel’s choice is limited to a re-run of her first-term “grand coalition” with her traditional SPD rivals or the first-ever national alliance with the Greens. Neither party rushed to endorse a coalition.

A repeat of the grand coalition “is much as markets had expected going into the election, so the euro has rallied only modestly,” Darren Gibbs, the chief economist at Deutsche Bank AG in Auckland, wrote in a note to clients today.

European Central Bank President Mario Draghi will speak in the European Parliament in Brussels today.

The euro climbed 3.6 percent this quarter versus the dollar, poised for its biggest advance since the first three months of 2011.

Euro Longs

The difference in the number of wagers by hedge funds and other large speculators on a gain in the euro compared with those on a drop, or net longs, climbed to 31,907 in the week ended Sept. 17, Commodity Futures Trading Commission data show. That’s the most since Aug. 27, when bullish bets climbed to a two-year high. Bets on a slide in the yen declined to 88,794 over the same period from 95,066 in the period through Sept. 10, according to the figures.

A composite index based on a survey of purchasing managers in euro-area services and manufacturing industries rose to 51.8 in September from 51.5 in August, London-based Markit Economics is forecast to say today according to a Bloomberg News survey. A reading above 50 indicates expansion.

The dollar declined for a second day versus the yen before Fed Bank of New York President Dudley, Atlanta Fed President Dennis Lockhart and Dallas Fed President Richard Fisher are scheduled to speak today. The central bank last week unexpectedly refrained from reducing its $85 billion in monthly asset purchases, saying it needs to see more signs of sustained labor market gains.

Fed Uncertainty

“Dollar-yen, for quite some time now, has been mainly driven by the Federal Reserve’s taper expectations,” said Sue Trinh, a senior currency strategist at Royal Bank of Canada in Hong Kong. “There’s a lot of uncertainty as to where we stand with tapering.”

RBC predicts the dollar will fall to 92 yen by year-end.

Bullard, a voter on policy this year, said Sept. 20 that a “small tapering” was possible in October. The central bank will be able to weigh the September jobs report and revisions of prior months as well as updated housing reports at its Oct. 29-30 meeting, he said.

Australia’s dollar advanced after a report showed manufacturing expansion in China, the nation’s biggest trading partner. The preliminary reading for a Chinese manufacturing Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics rose to 51.2 this month from 50.1 in August. The Bloomberg survey median was for 50.9.

The Aussie gained 0.3 percent to 94.219 U.S. cents.

To contact the reporter on this story: Kristine Aquino in Singapore at kaquino1@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net.

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net.