By Anchalee Worrachate and Ron Harui
Feb. 19 (Bloomberg) -- The euro rose from near a three-month low against the dollar on speculation German Chancellor Angela Merkel will signal Europe’s largest economy plans to take action to help ease the financial turmoil in the region.
The euro snapped three days of losses against the dollar after Finance Minister Peer Steinbrueck said yesterday Germany would show its “ability to act” as some of the 16 countries sharing the currency struggle with the global financial crisis. Merkel will hold a joint press conference with European Commission President Jose Barroso today in Berlin. The dollar fell against the yen after a technical chart signaled its advance to a six-week high was too rapid.
“Germany is finally waking up to reality that if they want to preserve that project which is the euro, then they’ll have to open up their own purse strings and help their neighbors,” said Geoffrey Yu, a currency strategist in London at UBS AG, the world’s second-biggest foreign-exchange trader. “That helped to lift the euro after its recent underperformance.”
The euro climbed to $1.2642 as of 9 a.m. in London from $1.2530 in New York yesterday, when it touched $1.2513, the lowest level since Nov. 21. Europe’s single currency traded at 118.26 yen from 117.50 yen. The dollar fell to 93.54 yen from 93.79 yesterday, when it reached 93.96, the highest level since Jan. 7.
Bank Nationalization
Merkel’s Cabinet yesterday approved draft legislation allowing the state to take over lender Hypo Real Estate Holding AG, paving the way for the first German bank nationalization since the 1930s. The bill, which will be put to parliament on April 3, lets the government carry out compulsory purchases of shares in “systemically relevant” banks.
“This is an appropriate response when it comes to resolving the banking system problem,” said Akio Yoshino, chief economist in Tokyo at Societe Generale Asset Management Ltd., a unit of France’s third-largest bank. It may “help to halt the recent steep decline of the euro.”
The German parliament approved a 480 billion-euro bank rescue plan in October, offering lenders capital infusions, debt guarantees and the option to assume toxic assets. Last month, Merkel agreed to create a so-called “Germany Fund” of as much as $135 billion to help companies weather the global economic crisis. Lawmakers will vote on a second stimulus package tomorrow comprising tax relief, loans and public infrastructure investment, bringing total stimulus to about 80 billion euros.
Moody’s Investors Service said on Feb. 17 it may cut the ratings of several banks with units in eastern Europe that are coming under “downward pressure,” citing weakening economies.
‘Solvency Difficulties’
Steinbrueck said this week he expects a number of nations in the euro region will experience funding problems. “Some countries are step by step approaching solvency difficulties,” he said in a speech Feb. 16, declining to identify any by name.
“We would show our ability to act” should countries face problems, the minister told reporters yesterday in Berlin. “A breakup of the euro region “is absolutely absurd, with a view to the economic consequences.”
Poland’s zloty slumped 22 percent this year following a 17 percent loss in 2008, the largest since 1997. Hungary’s forint has weakened 21 percent in 2009 after a 9 percent decline in 2008. The zloty traded at 3.7887 per dollar from 3.8120 yesterday, while the forint was at 240.62, from 241.66.
Risk Reversals
Premiums on euro put options have risen to the highest in almost a month as the European currency trades near the lowest since November. One-month 25-delta risk reversals, which measure demand for calls and puts, show the cost on euro put options climbed yesterday to 0.61 percent higher than the cost for euro calls, the most since Jan. 26. It was 0.52 percent today.
A put option gives a holder the right without obligation to sell an underlying asset, while a call option gives the holder the right to buy an asset. Risk reversals show the prices of a call option relative to a put option on the same currency.
The German government also plans changes to insolvency rules that would improve chances of rescuing troubled banks and non- financial companies, the Financial Times Deutschland reported, citing government officials they didn’t name.
The dollar ended two days of gains versus the yen after a chart some traders use to predict price movements showed this week’s advance to a six-week high was overdone.
“The dollar-yen has been overbought,” said Ryohei Muramatsu, manager of Group Treasury Asia at Commerzbank AG in Tokyo. “It also has failed to breach resistance at 94, so there’s a likelihood that some players unwound long positions.”
The U.S. currency’s 14-day stochastic oscillator against the yen was 89, according to Bloomberg data. A level above 80 suggests a currency may have risen too quickly and is poised to decline. A long position is a bet an asset will rise.
U.S. Automakers
The dollar also weakened on speculation the largest U.S. automakers may fail unless they get increased government aid.
General Motors Corp. and Chrysler LLC, which are seeking as much as $21.6 billion in additional federal assistance, have a 70 percent likelihood of filing for bankruptcy, Moody’s said yesterday. GM and Chrysler met a deadline yesterday requiring they show progress in revamping operations with $17.4 billion in loans granted so far.
“The uncertainties about the big three automakers may weigh on the upside of the dollar,” said Takashi Kudo, director of foreign-exchange sales in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph and Telephone Corp. “If a Chapter 11 filing happens, the initial reaction should be a sell-off of the dollar.”
The ICE’s Dollar Index, which tracks the U.S. currency versus the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, fell to 87.312 today, from 88.007.
Producer Prices
U.S. producer prices may have fallen 2.5 percent last month from a year earlier, according to a Bloomberg News survey before a Labor Department report today, signaling the world’s biggest economy may be heading for a period of sustained deflation. A separate Labor report tomorrow will show consumer prices dropped 0.1 percent in the 12 months to January, the first annual decline since 1955, according to another Bloomberg survey.
“The markets may begin to perceive that the U.S. economy will fare worse than those of other major countries,” said Lee Wai Tuck, a currency strategist at Forecast Pte in Singapore. “This is likely to be negative for the dollar.”
To contact the reporters on this story: Anchalee Worrachate at Ron Harui in Singapore at rharui@bloomberg.net;
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