Euro Set for Biggest Weekly Drop in 3 Months

By Monami Yui - Dec 16, 2011 10:18 AM GMT+0700

The dollar and the yen declined against most of their major peers as evidence the U.S. economy is gaining momentum eased demand for havens.

The Australian and New Zealand dollars rebounded from two- week lows as Asian stocks extended gains in global equities, boosting demand for higher-yielding assets. The euro headed for the steepest weekly drop versus the greenback in three months as European nations prepare for bill auctions next week amid concern policy makers can’t contain the region’s debt crisis. China’s yuan rose the most since a dollar peg ended July 2005.

“The U.S. numbers were better yesterday and that’s certainly giving a little bit of upside to risk appetite,” said Mitul Kotecha, head of global currency strategy at Credit Agricole CIB in Hong Kong. “That might provide some support for risk currencies” such as the euro and Australian dollar.

The U.S. dollar declined 0.1 percent to $1.3036 per euro as of 12:16 p.m. in Tokyo from New York yesterday. The currency has strengthened 2.7 percent this week, the biggest advance since the five days ended Sept. 9. The U.S. currency was little changed at 77.87 yen. The yen dropped 0.2 percent to 101.55 per euro.

The 17-nation euro is headed for a 2.6 percent loss versus the dollar this year and a 6.4 percent decline against the yen.

The so-called Aussie climbed 0.5 percent to 99.71 U.S. cents, after touching 98.61 cents yesterday, the lowest level since Nov. 28. The kiwi jumped 0.8 percent to 75.94 U.S. cents from yesterday, when it sank to 74.62, also the least since Nov. 28.

The MSCI (MXAP) Asia Pacific Index of shares rose 0.4 percent.

U.S. Data

U.S. Labor Department figures yesterday showed initial jobless claims decreased by 19,000 to 366,000 last week, the fewest since May 2008. The median forecast of economists surveyed by Bloomberg News was 390,000.

Separately, two reports yesterday showed manufacturing in the regions covered by the Federal Reserve Banks of New York and Philadelphia accelerated more than forecast in December.

The Fed’s policy-setting panel said on Dec. 13 the economy “has been expanding moderately,” compared with the Nov. 2 assessment that growth “strengthened somewhat.”

The dollar has appreciated 2 percent in the past month, the best performance among 10 currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro has fallen 1.7 percent and the yen has advanced 0.7 percent.

“The U.S. economy has certainly been pretty stable for several months,” said Greg Gibbs, a foreign-exchange strategist in Sydney at Royal Bank of Scotland Group Plc. Recent demand for the U.S. dollar may have been “excessive,” he said.

Debt Auctions

France is scheduled to sell as much as 7 billion euros ($9.1 billion) of bills on Dec. 19. Spain and Greece will also offer short-term government securities next week.

Standard & Poor’s said last week it may lower France’s credit rating by two levels in a possible euro-area downgrade stemming from the failure of the region’s leaders to arrest a debt crisis that began in Greece in 2009 and now presents the biggest threat to the world economy.

“The French debt sales in particular will be closely watched,” said Junichi Ishikawa, an analyst in Tokyo at IG Markets Securities Ltd. “Poor results may intensify the market’s fear that France will lose its AAA rating, and it may add to downward pressure on the euro.”

Ishikawa forecasts the euro may fall to the January low of $1.2867 by the end of this month.

ECB’s Draghi

Gains in the euro were also limited after European Central Bank President Mario Draghi said yesterday there’s no “external savior” for indebted countries that don’t implement structural reforms and the central bank’s program of buying government bonds isn’t limitless.

The ECB is buying the bonds of debt-strapped nations such as Italy and Spain after they agreed to implement austerity measures to improve their finances. Draghi nevertheless reiterated in a speech in Berlin yesterday that the ECB’s bond program is “neither eternal nor infinite.”

He said an “unavoidable” short-term economic contraction in the euro area may be mitigated by a return of confidence if governments implement budget consolidation plans.

“In the medium term, sustainable growth can be achieved only by undertaking deep structural reforms that have been procrastinated for too long,” Draghi said.

China’s yuan gained amid optimism policy makers will avoid a sharp slowdown in the world’s second-largest economy.

“The fixing was firmer and at market open there was solid dollar offer interest, in particular by Chinese banks,” said Dariusz Kowalczyk, Hong Kong-based senior strategist at Credit Agricole CIB. “Improved sentiment in global markets is helping as is news that China is easing curbs in the property sector which will limit downside risks to growth.”

The Chinese currency gained 0.4 percent to 6.3475 per dollar after earlier rising as much as 0.7 percent, according to China Foreign Exchange Trade System. The central bank raised its daily reference rate by 0.1 percent to 6.3352.

-- With assistance from Mariko Ishikawa in Tokyo and Kyoungwha Kim in Beijing. Editors: Garfield Reynolds, Benjamin Purvis

To contact the reporters on this story: Monami Yui in Tokyo at myui1@bloomberg.net;

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