Euro Gains for First Time Since October Before Crisis Summit; Dollar Drops

By Catarina Saraiva and Allison Bennett - Dec 3, 2011 12:00 PM GMT+0700

The euro advanced for the first time in five weeks against the dollar as six central banks including the Federal Reserve acted to make more funds available to lenders to keep Europe’s debt crisis from deepening.

Gains in the shared currency were tempered by concern a summit of European leaders next week won’t be able to stem the two-year-old crisis that began in Greece. South Africa’s rand was the best performer among the dollar’s 16 most-traded peers as stocks and commodities rebounded from two weeks of losses. The greenback and the yen were the biggest losers as demand for safety faded.

“The overall hope is that by Friday we’ll be able to get a lot more financial monetary stimulus and a comprehensive plan to save Europe,” Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York, said yesterday. “You have a huge week next week.”

The euro rose 1.2 percent to $1.3391 yesterday, its first weekly gain since the five days ended Oct. 28. It advanced from a seven-week low of $1.3212 that was reached Nov. 25 as investors avoided risk. The 17-nation currency was strengthened 1.5 percent versus the yen to 104.43 in its first weekly advance since Nov. 4. The dollar gained for a second week against the yen, rising 0.3 percent to 77.90 yen.

South Africa’s rand appreciated 6.2 percent to 8.0437 in its biggest weekly gain since February 2009.

Franc Weakens

The Swiss franc declined versus the euro as Switzerland said it may consider additional steps to support the central bank in its fight to curb the currency’s gains. The franc slipped 0.2 percent to 1.2342 per euro.

The cost for European banks to fund in dollars shrank from the most expensive since 2008 after the central banks said Nov. 30 they’d cut the rate on dollar liquidity swap lines.

The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, fell to as low as 1.19 percentage points below the euro interbank offered rate on Dec. 1. It touched 1.63 percentage points on Nov. 30.

The central banks, including the ECB and Bank of Japan, agreed to reduce their rate to the dollar overnight index swap rate plus 50 basis points, or half a percentage point, from 100 basis points, the Fed said in a statement.

“It doesn’t solve all of the euro zone’s problems, but it reduces some of the financial-system concern,” Greg Anderson, a currency strategist at Citigroup Inc. in New York, said Nov. 30.

Loans Through IMF

The euro reached $1.3548 yesterday, the strongest intraday level since Nov. 22, on optimism European central banks may funnel loans through the International Monetary Fund to fight the debt crisis. Two people familiar with the negotiations said the region’s finance ministers gave the go-ahead for work on the IMF plan at a Nov. 29 meeting. The proposal could deliver up to 200 billion euros to fight the debt crisis, said the people, who declined to be named because talks are at an early stage.

European Union leaders meet Dec. 9 in Brussels to address the euro region’s debt crisis.

“We are now entering the critical period of 10 days to complete the crisis response,” EU Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Brussels on Nov. 30. “It’s very important that we at this juncture reinforce our financial firewalls” to “reduce market turbulence,” he said.

Futures traders increased bets the euro will fall against the dollar, data from the Washington-based Commodity Futures Trading Commission show. So-called net-short wagers rose to 104,302 in the week ended Nov. 29, the most since June 2010.

China’s Bank Move

The dollar and the yen slid on Nov. 30 as China, in a move to encourage growth, cut the amount of cash banks must set aside as reserves for the first time since 2008, damping safety demand. The People’s Bank of China said reserve ratios will decline by 50 basis points effective Dec. 5. That may add 350 billion yuan ($55 billion) to the nation’s financial system, according to UBS AG.

Australia’s dollar climbed 5.2 percent this week to $1.0215 as the Standard & Poor’s 500 Index of stocks gained 7.4 percent and the S&P GSCI index of 24 raw materials rose 3.5 percent. Neither gauge had posted a weekly gain since Nov. 11.

“All the developments built upon each other,” Eric Viloria, senior currency strategist for Gain Capital Group LLC in New York said Nov. 30. “You have China’s ratio cut, which was supportive of risk, you had lower swap rates, which was extremely supportive, so you saw big spikes in commodity currencies.”

The Dollar Index (DXY), which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, weakened 1.2 percent to 78.683.

Action by Japan

Japan’s currency fell yesterday versus most major peers as Finance Minister Jun Azumi said he’ll take action on speculative currency moves. Japan sold 9.09 trillion yen ($116.5 billion) in the currency market from Oct. 28 to Nov. 28, the Ministry of Finance said on its website, to stem yen appreciation.

The yen advanced 2.14 percent over the past month in the best performance against nine developed-market peers measured by Bloomberg Correlation-Weighted Currency Indexes. The dollar rose 2.05 percent, and the euro declined 0.88 percent.

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Allison Bennett in New York at abennett23@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net