Euro Rises From Near Three-Month Low on Outlook for German Aid

By Ye Xie and Anchalee Worrachate

Feb. 19 (Bloomberg) -- The euro rose from near the lowest level against the dollar in three months on speculation German Chancellor Angela Merkel will signal Europe’s largest economy plans to help ease financial turmoil in the region.

The 16-nation currency gained for the first time in four days on the outlook for a European rescue, and Goldman Sachs Group Inc. said the euro will rebound to $1.35. The dollar and yen tumbled against most of their major counterparts on reduced demand for the U.S. and Japanese currencies as havens.

“The euro suffered in the last few days as the market was concerned about western Europe’s exposure to eastern European countries,” said Meg Browne, a currency strategist at Brown Brothers Harriman & Co. in New York. “Now the Europeans are working on a solution. Euro-positive sentiment can carry on.”

Europe’s currency rose as much as 1.8 percent to $1.2760, its biggest intraday gain since Dec. 30, before trading at $1.2707 at 10:21 a.m. in New York. It touched $1.2513 yesterday, the lowest level since Nov. 21. The euro increased 1.8 percent to 119.59 yen from 117.50, after touching 120.34, the highest level since Jan. 19.

The dollar rose above 94 yen for the first time since Jan. 7, gaining momentum after breaking the 100-day moving average. It traded at 94.13 yen, compared with 93.79 yesterday.

Poland’s zloty strengthened 2.6 percent to 4.6558 per euro and Czech’s koruna advanced 1.2 percent to 28.60 on speculation Germany will provide aid. The koruna touched 29.68 on Feb. 17, the weakest level since October 2005, and the zloty declined as Moody’s Investors Service said it may cut the ratings of several banks with units in eastern Europe.

Euro’s Tumble

The euro tumbled 1.7 percent against the dollar two days ago as the Moody’s report raised concern financial turmoil in eastern Europe may slow growth in the countries that use the common currency.

German Finance Minister Peer Steinbrueck told reporters yesterday in Berlin that “we would show our ability to act” should countries in the euro region face problems and added that bets on a breakup of the currency “is absolutely absurd.”

Merkel’s cabinet approved draft legislation yesterday allowing the state to take over lender Hypo Real Estate Holding AG, paving the way for the first German bank nationalization since the 1930s. Merkel will hold a joint press conference with European Commission President Jose Barroso today in Berlin.

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 it didn’t name.

‘Waking Up’

“Germany is finally waking up to the 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 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 dollar fell 3.2 percent to 6.8387 Norwegian kroner and 1.9 percent to 64.91 U.S. cents versus the Australian dollar on speculation government efforts to revive growth will reduce demand for the world’s reserve currency as a haven.

The ICE’s Dollar Index, which tracks the U.S. currency versus the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, fell 1 percent to 87.161 today after touching 88.254 yesterday, the highest level since Nov. 21.

Weaker Yen

The yen weakened 3.6 percent to 13.78 versus the Norwegian krone and 2.3 percent to 61.16 against the Aussie today on bets Japanese investors will increase the purchase of overseas assets. Total net purchases of overseas securities reached 1,544.4 billion yen ($16.4 billion) during the week ended Feb. 14, according to figures based on reports from designated major investors released by the Ministry of Finance in Tokyo.

Investors should buy the euro because the EU may bail out member states in financial difficulties, reducing the chance of countries leaving the single currency, according to Goldman Sachs. There’s “reduced Economic and Monetary Union breakup probability,” analysts led by Thomas Stolper in London wrote in a note today.

Premiums on euro put options rose yesterday to the highest in almost a month as the European currency traded 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 biggest difference since Jan. 26. It was 0.30 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.

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