Euro Extends Biggest Weekly Rally Since January on G-20 Optimism

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October 14, 2011, 5:29 PM EDT By Catarina Saraiva

Oct. 14 (Bloomberg) -- The euro extended its biggest weekly gain versus the dollar in more than two years on speculation Europe’s sovereign debt crisis will be contained as Group of 20 finance ministers met to confront the region’s turmoil.

The yen fell against the dollar on bets Japanese authorities will take steps to limit its gains. A gauge of the dollar against the currencies of major U.S. trading partners dropped to a four-week low as an increase in retail sales buoyed stocks and reduced demand for a refuge. The euro rose versus the dollar as Treasury Secretary Timothy F. Geithner said “Europe is clearly” moving to a crisis solution.

“There’s a combination of better U.S. economic data and some progress, at least discussion-wise, that the European policy makers are heading in the right direction,” said Mark McCormick, a currency strategist at Brown Brothers Harriman & Co. in New York. “People were pricing in a meltdown two weeks ago, and now you’re seeing a short-covering rally for a lot of these” higher-yielding currencies. A short is a bet the price of an asset will fall.

The euro rose 0.8 percent to $1.3882 at 5 p.m. in New York and was poised for a 3.8 percent gain this week, the most since March 2009. The shared European currency tumbled 7.7 percent in the third quarter, the most since June 2010. The euro appreciated 1.2 percent to 107.20 yen today after touching 107.45, the highest level since Sept. 9.

A $4.2 billion increase in China’s currency reserves in the third quarter to $3.2 trillion was the smallest gain since 2000, according to Bloomberg data.

China’s Holdings

Weakness in the euro last quarter pulled down the dollar value of China’s holdings in that currency and capital outflows may have also limited the gain, said Ding Shuang, an economist in Hong Kong at Citigroup Inc. The yuan rose 0.1 percent to 6.3776 per dollar today in Shanghai.

The U.S. Treasury Department said today it would delay its twice-yearly report on global exchange-rate policies, including China’s, until later this year.

The Treasury said the delay will “give us a chance to assess progress following several international meetings,” including this week’s G-20 finance ministers’ session in Paris, a G-20 summit in November and meetings involving Asia-Pacific finance ministers and leaders in November.

The Australian dollar advanced 1.5 percent to $1.0340, extending this week’s gain to 5.9 percent as the annual rate of inflation in China, the South Pacific nation’s biggest trading partner, stayed above 6 percent.

Yen Versus Dollar

The yen slid 0.4 percent to 77.22 versus the dollar as Dow Jones Newswires reported government officials said they would take new steps against a strong yen as early as next week.

“This is a very direct response to people not wanting to be too long yen going into the weekend in case there’s some real meat in the talk of action early next week,” said Alan Ruskin, global head of Group of 10 foreign-exchange strategy at Deutsche Bank AG in New York. A long is a bet an asset may gain in value.

Dow Jones reported the steps may include more funding to encourage foreign mergers and acquisitions and won’t include a tax on currency transactions.

The yen increased to a post-World War II high of 75.95 against the dollar in August, making Japan’s exports more expensive, even after the government intervened in the currency market for the third time in the past year, selling yen in an effort to curb its appreciation.

Dollar Index

IntercontinentalExchange Inc.’s Dollar Index, which tracks the greenback against the currencies of six major U.S. trading partners, decreased today as much as 0.7 percent to 76.508, the lowest level since Sept. 16, on reduced demand for a refuge in the world’s main reserve currency.

U.S. retail sales increased 1.1 percent last month, the most since February, after a revised 0.3 percent gain in August, the Commerce Department reported today. The median forecast of 85 economists in a Bloomberg News survey was for an advance of 0.7 percent.

“This report is a game changer, following nonfarm payrolls,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world’s largest custodial bank, with more than $26 trillion in assets under administration. “These two reports have had a significant impact on market psychology.”

Nonfarm payrolls increased by 103,000 last month after a 57,000 gain in August, the Labor Department said last week. The jobless rate held at 9.1 percent.

Rally in Stocks

The Standard & Poor’s 500 Index rallied 1.7 percent today on the gain in U.S. retail sales. Crude oil for November delivery surged 3.2 percent to $87.30 a barrel.

The euro rose as G-20 and International Monetary officials said the ministers meeting in Paris are working on a European rescue plan including boosting the IMF’s lending resources.

European leaders may complete the rescue plan at an Oct. 23 summit to present to a meeting of G-20 leaders on Nov. 3-4. The aim is to put together what the French and German governments call a “durable” fix to the turmoil that has propelled Greece to the edge of default and is roiling global markets.

“They’re talking about a much more comprehensive package, a much more forceful package and measures of backstop for sovereign governments and the preventive recapitalization of banks,” Geithner said in an interview on CNBC today. “Those are the kinds of things they need to do. Of course, the hard part is still ahead.”

Euro’s Gain

Europe’s currency has strengthened 1.2 percent in the past month, according to Bloomberg Correlation-Weighted Currency Indexes, which gauge the currencies of 10 developed nations. The yen has fallen 0.8 percent.

Investors should sell the euro against the Canadian dollar, betting the shared currency will weaken to C$1.3660, Standard Bank Plc said.

The bank recommends entering a short position on the euro at C$1.4030 with an initial target of C$1.3850, Steven Barrow, head of Group of 10 currency strategy in London at South Africa’s largest bank, wrote today in a note to clients. The trade should be abandoned if the euro strengthens to C$1.4380, he wrote. The euro dropped 0.3 percent to C$1.4019 today.

Hedge funds and other large speculators increased bets that the dollar will gain against the yen, euro, Australian dollar, Swiss franc, Canadian dollar, pound, Mexican peso and New Zealand dollar. Net dollar long positions increased to 132,835 contracts in the week ended Oct. 11, figures from the Commodity Futures Trading Commission showed today. That’s the highest level since June 2010.

--With assistance from Keith Jenkins and Lucy Meakin in London. Editors: Dennis Fitzgerald, Paul Cox

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net

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