Euro Rises From Three-Week Low as German Sentiment Advances

By Oliver Biggadike and Bo Nielsen

June 16 (Bloomberg) -- The euro rose from a three-week low versus the dollar after German investor confidence increased in June more than economists forecast.

The 16-nation currency also pared a drop against the yen as the ZEW index advanced to the highest level in three years. The dollar dropped against most of its major counterparts as leaders of the BRIC nations, Brazil, Russia, India and China, considered buying each other’s bonds and swapping currencies to reduce dependence on the greenback.

“There’s no denying it was a strong ZEW,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. Combined with the BRIC nations’ discussion of the dollar, “it was a pretty potent driver for a short squeeze in euro-dollar,” he added.

The euro climbed 0.6 percent to $1.3882 at 9:19 a.m. in New York, from $1.3803 yesterday. It earlier fell to $1.3749, the lowest level since May 21. The euro traded at 134.73 yen, compared with 134.99, after earlier dropping 1.7 percent to 132.74, the lowest level since May 28. The yen advanced as much as 1.8 percent to 96.08 per dollar, the biggest intraday gain since May 29, from 97.84, before trading at 97.12.

The ZEW Center for European Economic Research in Mannheim, Germany, said its index of investor and analyst expectations, designed to predict developments six months ahead, increased this month to 44.8, the highest level since May 2006. Economists expected a reading of 35, according to the median of 35 forecasts in a Bloomberg News survey.

‘Scraping Along’

“The panic situation is behind us, but the economy is still only scraping along the bottom,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi Ltd. in London. “The reflation trade may have one more leg up left in it before it loses steam.”

Europe’s currency may rise to as high as $1.50 per dollar in the next three months before retreating to about $1.35 by the end of the year, Hardman said.

The Dollar Index, used by the ICE to track the greenback against six major currencies including the euro, pound and Swiss franc, fell 0.8 percent.

The yen posted its biggest intraday gain versus the dollar in two weeks after the Bank of Japan raised its view of the nation’s economy for a second month and left the target overnight lending rate at 0.1 percent.

The dollar remained lower versus the euro on reduced demand for the greenback’s safety as a Commerce Department report showed U.S. builders broke ground in May on more houses than economists forecast.

‘Risk Appetite’

“We still need evidence that these improvements are feeding through to the economy for risk appetite to continue,” said Henrik Gullberg, a London-based currency strategist at Deutsche Bank AG, the biggest foreign-exchange trader.

Output at U.S. factories, mines and utilities decreased 1.1 percent last month after dropping 0.7 percent in April, Federal Reserve figures showed today. The median forecast of 74 economists surveyed by Bloomberg News was for a 1 percent drop.

The dollar declined versus the euro on speculation leaders from the BRIC nations will discuss the greenback’s role as an international reserve currency at their meeting today in the Ural Mountains city of Yekaterinburg, Russia.

“If we get a change in attitude from Russia, maybe we will get some softening of the U.S. dollar in the short term, but I don’t think it’s a medium-term trend,” said Sebastien Barbe, a Hong-Kong based currency strategist at Calyon, the investment banking unit of France’s Credit Agricole SA.

Medvedev on Currency

Russia’s President Dmitry Medvedev said in Yekaterinburg that the world economy can’t rely on one reserve currency.

“The strengthening of the international currency system” requires first creating regional reserve currencies and then a “supranational currency,” Medvedev told leaders of the member states of the Shanghai Cooperation Organization. “Reinforcing the international currency system should not be done through reinforcing only the dollar,” he added.

The BRIC countries have combined reserves of $2.8 trillion and are among the biggest holders of U.S. Treasuries. The first BRIC summit comes after Brazil, China and Russia announced plans to shift some foreign reserves into International Monetary Fund bonds, driving Treasuries and the dollar lower.

Russia is hosting back-to-back summits of the Shanghai Cooperation Organization, which is a regional security group, and the BRIC nations.

To contact the reporters on this story: Oliver Biggadike in New York at obiggadike@bloomberg.net; Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net