BLBG: Euro Rises as Stocks Advance, Bank Borrowing Costs Decline
By Lukanyo Mnyanda and Stanley White
Nov. 4 (Bloomberg) -- The euro strengthened against the dollar and the yen as gains in European stocks and declines in money-market rates eased concern the slowdown in the 15-nation economy will deepen.
The single European currency rebounded from the lowest level in a week against the dollar as Europe's Dow Jones Stoxx 600 Index rose for a sixth day and the cost of borrowing euros for three months dropped to the lowest since March. The pound fell for a third day versus the euro as Britain's construction industry slid in October. The European Central Bank and Bank of England meet to decide interest rates in two days' time.
``Risk aversion is a bit lower and that's allowed the euro to gain some ground,'' said Antje Praefcke, a currency strategist in Frankfurt at Commerzbank AG. ``We're heavily dependent on the stock markets and people don't want to trade too heavily before the ECB's decision.''
The euro advanced to $1.2757 as of 6:32 a.m. in New York, from $1.2643 yesterday. It earlier weakened 0.5 percent to $1.2527, the lowest level since Oct. 28. The euro climbed to 126.72 yen, from 125.33. The yen fell to 99.34 per dollar, from 99.12 yesterday and 98.38 earlier today.
The MSCI World Index added 1.2 percent, driving the benchmark for 23 developed countries to its sixth consecutive gain, the biggest run of advances since July. Europe's Dow Jones Stoxx 600 Index climbed 1.7 percent, headed for the longest winning streak since August 2007.
Dollar Falls
The pound dropped to 80.50 pence per euro, from 79.91 yesterday. It has declined 9 percent against the euro and 20 percent versus the dollar this year amid evidence Britain's economy is entering its first recession since the early 1990s. The Bank of England will cut the main interest rate to 4 percent from 4.5 percent on Nov. 6, according to a Bloomberg survey.
The euro dropped earlier against the yen along with other high-yielding currencies as the Reserve Bank of Australia lowered borrowing costs by a greater-than-forecast three- quarters of a percentage point to 5.25 percent, making it less attractive to buy overseas assets using funds borrowed in Japan.
Japan's currency traded at 67.70 per Australian dollar, after earlier rising to 65.05, from 67.05 yesterday. The yen dropped to 59.35 against the New Zealand dollar, after earlier strengthening to 57.62.
The yen typically gains when investors become more averse to risk, causing them to reverse so-called carry trades. In such transactions, they purchase higher-yielding assets with funds borrowed in nations with lower interest rates. Japan's key rate is 0.3 percent, the lowest among major economies.
Rate Decision
Gains by the euro may be limited before the ECB's rate decision Nov. 6. The central bank will trim its benchmark rate by half a percentage point to 3.25 percent, according to a Bloomberg survey of economists.
The euro-area economy probably entered a recession this year and will stagnate in 2009, the European Commission said yesterday. European manufacturing contracted at a record pace in October and faster than initially estimated, other data showed.
``The trend is for the euro to weaken,'' said Tokichi Ito, deputy general manager of foreign exchange in Tokyo at Trust & Custody Services Bank Ltd., a unit of Japan's second-largest publicly traded lender. ``Recession has reared its head in Europe, and that's fairly negative for sentiment.''
The dollar rose since the end of September as the prospect of a global recession prompted policy makers from China to the Middle East to cut borrowing costs.
The Federal Reserve reduced its target rate for overnight bank loans a half-percentage point to 1 percent on Oct. 29. Futures on the Chicago Board of Trade show a 55 percent chance it will cut it again, to 0.5 percent, next month.
Dollar Index
The ICE's Dollar Index, which tracks the greenback versus the currencies of six major U.S. trading partners, was at 85.69, after touching 87.88 on Oct. 28, the highest level since April 2006. It dropped to 70.70 in March, the lowest level this year.
``The dollar has been forced up,'' said Jim Rogers, chairman of Singapore-based Rogers Holdings, who correctly predicted the start of the commodities rally in 1999, in an interview on Bloomberg Television yesterday. ``There's a period of forced liquidation. My plan is to get out of the dollar sometime in the next few months.''
To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Stanley White in Tokyo at swhite28@bloomberg.net
