Euro Trades Near November High on ECB Rate Outlook; Yen Erases Its Gains

The euro rose toward its strongest since November against the dollar on speculation the European Central Bank will emphasize its readiness to raise interest rates as price pressures increase.

The single currency maintained gains from yesterday before a report forecast to show European retail sales increased and before U.S. figures tomorrow on non-farm payrolls. The yen erased gains versus the euro as reports the Arab League was studying a peace plan for Libya curbed demand for Japan’s currency as a refuge.

“The ECB must act to curb inflation given they already have sustained growth -- the U.S. doesn’t have that,” said Kurt Magnus, executive director of currency sales at Nomura Holdings Inc. in Sydney. “If payrolls disappoint in the U.S. we could see euro through $1.40 by Friday.”

The euro traded at $1.3867 as of 7:58 a.m. in London from $1.3866 in New York yesterday, when it reached $1.3891, the strongest since Nov. 9. Europe’s common currency was at 113.55 yen from 113.52 yen. The greenback fell as low as 81.77 yen before buying 81.89 yen from 81.87. It yesterday declined to 81.57, the weakest since Feb. 4.

The ECB, which aims to keep annual gains in consumer prices to just below 2 percent, will publish inflation projections for 2011 and 2012 today after its monthly policy meeting. Council member Yves Mersch said Feb. 21 the central bank may raise its 2011 inflation forecast to more than 2 percent from 1.8 percent. Policy makers have kept the benchmark interest rate at 1 percent since May 2009.

European Inflation

The euro was supported by “speculation the ECB will sharpen its anti-inflation rhetoric,” John Kyriakopoulos, head of currency strategy at National Australia Bank Ltd. in Sydney, wrote today in a note to clients.

Retail sales in the bloc rose 0.3 percent in January after falling 0.4 percent the prior month, according to a Bloomberg survey of economists before today’s European Union statistics office report. An index of services and manufacturing industries in the euro area rose to 58.4 from 57, a separate survey showed ahead of the Markit Economics data today. Figures above 50 indicate growth.

U.S. employers added 195,000 jobs last month, the most since May 2010, according to a Bloomberg News survey of economists before tomorrow’s Labor Department report.

Bernanke signaled in congressional testimony he will keep the Fed on course to finish $600 billion of Treasury purchases through June.

Bernanke Comments

Asked at a House Financial Services Committee hearing yesterday what conditions would warrant a third round of so- called quantitative easing, Bernanke said “what we’d like to see is a sustainable recovery. We don’t want to see the economy falling back into a double dip or to a stall-out.”

The Fed has kept its benchmark interest rate at zero to 0.25 percent since December 2008.

The yen erased gains after Al Arabiya TV cited the Arab League secretary general as saying the group is studying a plan proposed by Venezuelan President Hugo Chavez to end the violence in Libya.

Japan’s currency earlier climbed against most of its major peers as crude oil held above $100 a barrel. A U.S. government report showed crude stockpiles unexpectedly dropped last week, while fighting in Libya renewed concern that supply disruptions may spread to the Middle East.

Oil Prices

Nouriel Roubini, an economist who predicted the credit- market collapse, said yesterday an expansion of troubles in the Mideast could push oil prices as high as $140 to $150 per barrel, triggering a double-dip recession in parts of Europe.

“We could still see some more significant risk aversion,” said Jonathan Cavenagh, a currency strategist in Singapore at Westpac Banking Corp, Australia’s second-largest lender. “The Middle East situation still remains very uncertain.”

The yen typically strengthens in times of political, financial and economic turmoil. Japan’s trade surplus makes the currency attractive because it means the nation doesn’t have to rely on overseas lenders.

To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net; Ron Harui in Singapore at rharui@bloomberg.net.

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.