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Euro Touches High Versus Yen

Published: March 19, 2012 | 8:08 am
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The euro touched a 4 1/2-month high against the yen after German Chancellor Angela Merkel said European officials have discussed combining the euro-area’s bailout funds to reinforce the region’s financial firewall.

Demand for the 17-nation euro was also supported before Italian Prime Minister Mario Monti holds talks with unions and employers to revise labor laws this week. The yen traded near an 11-month low versus the dollar as Asian stocks extended last week’s rally, damping demand for haven assets. Federal Reserve Bank of New York President William C. Dudley speaks today in Melville, New York.

“There’s no doubt the market would very much like to see the two bailout funds combined,” said Sean Callow, a senior currency strategist in Sydney at Westpac Banking Corp. (WBC) “Anything that increases the firepower will be well received. It’s certainly one of the positives for the euro.”

The euro touched 110.15 yen, the highest since Oct. 31, before trading at 109.70 at 7:27 a.m. in London, 0.2 percent below its March 16 close in New York. The common currency bought $1.3168 from $1.3175 on March 16, when it rose 0.7 percent. The yen was little changed at 83.32 per dollar from 83.43. The Japanese currency on March 15 touched 84.18, the weakest since April 13.

The MSCI Asia Pacific Index (MXAP) of stocks rose as much as 0.4 percent, after it climbed 0.8 percent last week.

European Rescue Funds
European finance ministers have discussed “combination possibilities” for the permanent and temporary rescue funds ahead of a March 30 meeting in Copenhagen, Merkel said on March 16. Ministers may decide to increase the region’s crisis fund to a total capacity of 692 billion euros ($911 billion) when they meet, a euro-area official said separately.

An easing of Europe’s debt crisis has offered breathing room for Italy’s Monti to seek a labor-market overhaul. The Italian premier’s planned changes include a revision of firing rules and an expansion of jobless benefits.

Demand for the dollar was limited after U.S. inflation data last week rekindled expectation that the Fed may engage in additional monetary stimulus, having bought $2.3 trillion of Treasuries and mortgage-backed bonds in two rounds of purchases known as quantitative easing from December 2008 to June 2010. The U.S. consumer-price index excluding food and energy costs climbed 0.1 percent in February, the Labor Department reported on March 16 in Washington, half the pace projected by economists in a Bloomberg News survey.

QE3 Still Possible
The Fed left unchanged March 13 its assessment that economic conditions would probably warrant “exceptionally low” interest rates at least through late 2014. It has held its target rate to a range of zero to 0.25 percent since December 2008. Dudley, vice chairman of the policy-setting Federal Open Market Committee, will discuss the regional and national economies in his speech today.

“Dudley could come out and say QE3 is not off the table, and the economy will need to improve a great deal for them to rule out further easing,” said Westpac’s Callow, referring to the possibility of a third round of quantitative easing. “The U.S. dollar is likely to struggle.”

The yen has declined 1.7 percent in the past week, the worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar lost 0.3 percent, while the euro slid 0.2 percent in the same period.

‘Stronger Easing Bias’
Bank of Japan (8301) Governor Masaaki Shirakawa on March 13 indicated that the central bank will keep using monetary policy as a tool to tackle deflation.

“The view that Japan has a stronger easing bias than the U.S. is still intact,” said Kengo Suzuki, a foreign-exchange strategist in Tokyo at Mizuho Securities Co., a unit of Japan’s third-largest bank by market value. “There’s still lingering downward pressure on the yen against the dollar on the back of the divergence of U.S. and Japanese central-bank policies.”

Futures traders increased bets the yen will decline against the dollar. The difference in the number of wagers by hedge funds and other large speculators on a decline in the yen compared with those on a gain — so-called net shorts — was 42,380 on March 13, compared with net shorts of 19,358 a week earlier, figures from the Washington-based Commodity Futures Trading Commission show.

Stevens Speech
The Australian dollar rose against the greenback and yen after Reserve Bank Governor Glenn Stevens expressed confidence in China, the South Pacific nation’s largest trading partner. “China will have cycles like other economies, but it seems likely that the Chinese economy will grow pretty strongly on average for a while yet,” Stevens said, according to the text of a speech delivered in Hong Kong today.

The so-called Aussie reached 88.64 yen, its highest level since May, before trading at 88.40, 0.1 percent above last week’s close. It climbed 0.2 percent to $1.0609.

The Australian dollar may test the recent high of $1.0856 on Feb. 29 should it rise above the $1.0670 resistance level, according to JPMorgan Chase & Co., citing trading patterns.

“The near term setup argues for additional weakness” for the dollar against most Group-of-10 currencies, Niall O’Connor, a technical analyst at JPMorgan Chase & Co in New York, wrote in a note to clients dated yesterday.

Implied volatility of three-month options of Group of Seven currencies has dropped to 10.13 percent after it reached 10.72 last week, its highest level since Feb. 16, according to the JPMorgan G7 Volatility Index (JPMVXYG7). A decrease makes investments in currencies with higher benchmark lending rates more attractive because the risk in such trades is that market moves will erase profits.

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