Euro Rises Most in 3 Weeks as European Leaders Guarantee Banks

By Ye Xie and Anchalee Worrachate

Oct. 13 (Bloomberg) -- The euro rose the most in three weeks against the dollar and yen after European leaders agreed to guarantee bank borrowing and prevent failures that would further batter the credit markets.

The U.S. currency fell versus the Mexican peso and Australian dollar as the Federal Reserve and three other central banks announced unlimited dollar auctions, reducing demand for the greenback for funding among financial firms. Brazil's real, South Korea's won and the peso led a rally in emerging-market currencies as the Group of Seven nations pledged over the weekend to take ``all necessary steps'' to stem the market turmoil.

``It helps restore market confidence and avert further financial meltdown,'' said Brian Kim, a currency strategist at UBS AG in Stamford, Connecticut. ``It's positive for risky assets. If financial institutions stabilize, there's less of a flight toward the dollar.''

The euro rose as much as 2 percent, the most since Sept. 22, to $1.3682, before trading at $1.3609 at 10:44 a.m. in New York, from $1.3408 on Oct. 10. The euro advanced 1.6 percent to 137.12 yen, from 134.96. The dollar was little changed at 100.70 yen.

Foreign-exchange movements may be exaggerated because trading volumes are lower than normal due to public holidays in Japan, the U.S. and Canada, according to Takashi Yamamoto, chief trader at Mitsubishi UFJ Trust & Banking Corp. in Singapore.

Australian Dollar, Won

The Australian dollar rose 4.6 percent to 67.29 U.S. cents after the government guaranteed all bank deposits for three years.

South Korea's won climbed 5.4 percent to 1,240.42 per dollar, as efforts by global leaders to restore confidence in banks fueled demand for emerging-market assets. Mexico's peso gained 5.2 percent to 12.4478 and Brazil's real strengthened 6 percent to 2.1816.

The pound rose for the first time in four days, gaining 2.2 percent to $1.7423, as the U.K. government said it will invest in banks. Royal Bank of Scotland Group Plc, HBOS Plc, and Lloyds TSB Group will get 37 billion pounds ($64.4 billion), the government said in a Regulatory News Service statement. The funding will allow the banks to boost their so-called Tier One capital ratio to more than 9 percent.

European policy makers meeting in Paris yesterday pledged to guarantee until the end of 2009 bank-debt issues with maturities up to five years. Plans to recapitalize banks in the region will cost 300 billion euros ($409.7 billion), according to Goldman Sachs Group Inc.

`Clarity of Plans'

``The rebound in the euro, and in sterling, is a direct response to the clarity of bailout plans in the euro zone and the U.K.,'' said Simon Derrick, head of currency strategy in London at Bank of New York Mellon Corp. ``In the medium-term, this means a surge in national debt which won't bode well for these currencies. In the near-term, the plans give investors confidence that there won't be further banking failures.''

Losses in the dollar accelerated after the Fed said today the European Central Bank, the Bank of England and the Swiss National Bank will offer financial institutions unlimited funds in the U.S. currency, providing easier access to dollars in response to demand for loans. The central banks will conduct dollar auctions at maturities of seven, 28 and 84 days at a fixed interest rate, the Fed said on its Web site.

Decreased Bets

Futures traders decreased bets that the euro will decline against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission showed on Oct. 10.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- so-called net shorts -- was 18,662 on Oct. 7, compared with 28,932 a week earlier.

Treasury Secretary Henry Paulson said Oct. 10 that the government will buy equity ``as soon as we can'' in banks and other financial institutions to help them weather the worst credit crisis in seven decades. The Treasury Department said yesterday Paulson is studying Europe's debt-guarantee plan.

Finance ministers and central bankers from the Group of Seven countries said in a statement after a meeting in Washington on Oct. 11 they will take ``all necessary steps'' to repair credit markets.

``The G-7 and now the individual finance ministers and governments are really stepping up to try and recover some of this confidence which has been so punished to such low levels over the last few weeks,'' Patrick Bennett, a currency strategist at Societe Generale SA in Hong Kong, said in an interview with Bloomberg Television.

Japan's currency may rise to 95 per dollar should Japanese investment trusts, insurance companies and pension funds start selling foreign holdings, wrote Tohru Sasaki, chief strategist in Tokyo at JPMorgan and a former chief currency trader at the Bank of Japan, in a research note dated Oct. 10. Retail traders held $24 billion of bets the yen will decline on Oct. 9, down 50 percent from last month, the bank said in a report.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net.