By Yasuhiko Seki and Ron Harui
Aug. 26 (Bloomberg) -- The euro rose, approaching the strongest level in 11 weeks against the pound, on speculation business sentiment in Germany will point to an economic recovery in the region.
The euro traded near the highest level this week versus the dollar before a report forecast to show sentiment improved this month in Europe’s biggest economy. The pound traded near a one- month low against the yen after the Financial Times said Lloyds Banking Group Plc may have to write off 500 million pounds ($817 million) in loans, renewing concern financial losses will derail an economic recovery.
“The slew of economic data of late suggests that the global economy is now on the mend,” said Yousuke Hosokawa, a senior currency dealer in Tokyo at Chuo Mitsui Trust & Banking Co., a unit of Japan’s seventh-largest bank. “Lower-yielding currencies like the yen and the dollar will underperform against higher-yielding ones like the euro as risk appetite improves.”
Europe’s single currency was at 87.58 pence as of 6 a.m. in London from 87.45 pence in New York yesterday, when it rose to 87.65 pence, the highest level since June 8. The euro was at $1.4298 from $1.4296 yesterday.
The yen traded at 134.66 per euro from 134.65 yesterday in New York. The Japanese currency was at 94.17 per dollar from 94.18 yesterday. The Nikkei 225 Stock Average rose 1.4 percent and the MSCI Asia Pacific Index of regional shares advanced 0.7 percent.
Ifo Gauge
The Ifo institute in Munich will say its business climate index, based on a survey of 7,000 executives, increased to 89 from 87.3 in July, according to a Bloomberg News survey of economists. That would be the highest reading since October 2008. Ifo releases the report today.
“Business sentiment will probably improve, which is a plus for the economy,” said Masanobu Ishikawa, general manager of foreign exchange at Tokyo Forex & Ueda Harlow Ltd. “The euro may trade with a firm tone today, possibly targeting $1.4350.”
European Central Bank President Jean-Claude Trichet said on Aug. 22 there were “signs confirming that the real economy is starting to get out of the period of freefall.”
This “does not mean at all that we do not have a very bumpy road ahead of us,” he said.
Adding to signs the recession is easing, U.S. orders for durable goods, those meant to last several years, probably jumped 3 percent in July, reversing the previous month’s 2.5 percent decline, according a Bloomberg News survey of economists. The Commerce Department releases the data today.
Financial Losses
The yen climbed in early trading on concern financial losses will delay a recovery in the global economy, boosting demand for the currency as a refuge. It pared gains as Chinese shares drove an advance in regional stocks.
“There are two conflicting trading leads on risk- sentiment,” said Takashi Kudo, director of foreign-exchange sales in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp. “There is a tug of war between concerns over financial institutions and rising stock prices.”
Japan’s currency climbed after Colonial BancGroup Inc., the bank holding company under a criminal probe that was taken over Aug. 14 by North Carolina lender BB&T Corp., filed for bankruptcy. Its banking unit became the biggest bank to be seized by regulators since the collapse last year of Washington Mutual Inc.
“Given the size of Colonial, the initial reaction looks to be overdone,” Kudo said.
The yen strengthened yesterday after Atlanta-based SunTrust Banks Inc. said U.S. financial institutions may report more credit losses as commercial real estate falters
Lloyds Writedowns
The pound fell against 15 out of 16 major currencies after the Financial Times reported U.K. pub operator Admiral Taverns Ltd. is in talks with lenders about a possible debt-for-equity swap after it breached banking covenants. Lloyds’s Bank of Scotland unit is the company’s biggest lender, the FT said.
“The report suggests the state of the financial sector in the U.K. is still worrying,” said Hideki Amikura, deputy general manager of foreign exchange at Nomura Trust and Banking Co. in Tokyo. “It’s negative for the pound and positive for the yen and the dollar.”
The pound declined to 153.76 yen from 154.00 yen in New York yesterday, after earlier falling to 153.12 yen, the lowest level since July 22.
European Commission President Jose Barroso said no “firm recovery” has taken hold in Europe’s economy and pledged readiness to help hard-hit countries such as Lithuania.
“The impact of the financial and economic crisis is still tangible in Europe, and we have much still to do,” Barroso said at a press conference yesterday in Brussels with Lithuanian President Dalia Grybauskaite. “Several European economies are seeing encouraging signs of recovery, but firm recovery is not here yet.”
Dollar Weakness
The dollar will continue to weaken this year as the global economy recovers from recession and investors seek currencies linked to growth, strategists said in a panel on Bloomberg Radio.
“Investors in the U.S. and globally are sitting in too many T-bills and too much cash,” said Rebecca Patterson, global head of foreign exchange at JPMorgan Private Bank in New York. “As the world slowly gets better, they are going to want to take advantage of that. They want a better yield than you get in a T- bill, and that keeps the dollar under pressure.”
The greenback may depreciate as governments worldwide reduce the currency’s role in their foreign-exchange reserves, said David Wyss, chief economist at Standard & Poor’s.
“It will still be the biggest reserve currency but we will go back to a more normal distribution, back to more like what we had 10 or 15 years ago when the dollar was 70 percent of reserves instead of 90 percent of reserves,” he said today in Sydney at a conference.
-- With assistance from Steven Church in Wilmington and Edvard Pettersson Los Angels. Editors: Rocky Swift, Nicholas Reynolds
To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.
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