Euro Gains as New Governments in Italy, Greece Boost Investor Confidence

By Candice Zachariahs and Masaki Kondo - Nov 14, 2011 9:34 AM GMT+0700

The euro remained higher following a two-day rally on prospects investor confidence in Italy’s ability to contain its debt will be revived after Mario Monti, a former European Union competition commissioner, takes over as prime minister.

The 17-nation currency maintained its gain against the yen after Greece’s finance minister said his priority is to ensure the country receives a sixth loan under an EU-led bailout after Prime Minister Lucas Papademos took charge as head of an interim government. Australia’s dollar climbed as rising Asian stocks boosted demand for higher-yielding assets. The New Zealand dollar strengthened against most major peers after a report showed retail sales increased by the most since 2006.

“We’ve seen a more positive start to the week with the new technocrat governments in Italy and Greece, but there’s still a lot of uncertainty,” said Emma Lawson, a currency strategist at National Australia Bank Ltd. in Sydney. “We’ll try and test to the upside for the euro and the Aussie.”

The euro traded at $1.3761 as of 11:31 a.m. in Tokyo from $1.3750 on Nov. 11 in New York. Europe’s shared currency bought 106.21 yen from 106.10. The dollar was little changed from last week at 77.18 yen. The Australian dollar rose 0.2 percent to $1.0295 and 79.45 yen.

Italy’s President Giorgio Napolitano offered Monti the post of prime minister after sounding out the country’s political parties for their support in consultations yesterday.

Monti Government

Monti must present the names of his Cabinet ministers to Napolitano before he can be sworn in. He will then face confidence votes in both houses of parliament. Leaders of outgoing Premier Silvio Berlusconi’s People of Liberty party earlier told Napolitano that they’ll support a Monti government, virtually ensuring his confirmation in parliament, which may come this week.

New Zealand’s dollar, known as the kiwi, rose for a second day against its U.S. peer after the statistics bureau said sales adjusted for inflation surged 2.2 percent in the third quarter, the largest increase since the fourth quarter of 2006. That compared with the median estimate in a Bloomberg News survey of economists of a 0.6 percent advance.

The New Zealand dollar climbed 0.3 percent to 78.79 U.S. cents and 60.81 yen.

“New Zealand data this morning was very much on the strong side,” said Grant Turley, a senior currency strategist at Australia & New Zealand Banking Group Ltd. in Sydney. “Political stability in Europe and better data out of New Zealand are going to buoy appetite for Aussie and kiwi.”

The dollar weakened against 11 of its 16 major peers as the MSCI Asia Pacific Index of shares climbed 1.4 percent, sapping demand for the U.S. currency as a haven.

Japanese Growth

Japan’s Nikkei 225 Stock Average gained 1.2 percent after government data showed the nation’s gross domestic product grew at an annualized rate of 6 percent in the three months ended Sept. 30, the fastest pace since March 2010. The first expansion after three quarters of economic contraction added to evidence the country is recovering from a record earthquake in March.

The Bank of Japan will start a two-day policy meeting tomorrow. The central bank will leave the benchmark interest rate unchanged at a range of zero to 0.1 percent, according to economists surveyed by Bloomberg News.

Greek Exit

Gains in the euro were limited after Spiegel magazine reported the German government assumes that the consequences of an exit of Greece from the euro area can strengthen the single- currency region in the long term, without saying where it got the information.

Lawmakers are preparing for Greece’s departure from the common currency in case the debt-strapped country’s new government doesn’t commit to carrying forward reforms, the magazine said.

“That takes a little bit of the gloss off the euro and there’s also an Italian bond auction today and a Spanish one later this week,” said Tim Kelleher, Auckland-based head of institutional foreign-exchange sales at ASB Institutional, a unit of Commonwealth Bank of Australia. “My bias is to sell rallies in currencies like the euro, kiwi and Aussie.”

Italy will auction as much as 3 billion euros ($4.1 billion) of five-year notes maturing in September 2016 today, Germany will sell as much as 6 billion euros of two-year notes on Nov. 16 and Spain will sell bonds maturing in January 2022 on Nov. 17.

Merkel Speaks

German Chancellor Angela Merkel will address her party today after weeks of crisis fighting during which she raised the prospect of ejecting Greece from the euro and joined with French President Nicolas Sarkozy to call on Italy to hold to its budget pledges. She is now turning her attention to shaping the future of the euro and EU.

“I believe this is important for those who buy government bonds: that we make it clear that we want more Europe step by step, that is that the European Union, and the euro area in particular, grows together,” Merkel said in an interview with ZDF television late yesterday. “Otherwise people won’t believe that we can really get a handle on the problems.”

The euro has declined 0.8 percent over the past six months, according to Bloomberg Correlation-Weighted Indexes that track 10 developed market currencies.

To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net

To contact the editor responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net