By Keith Jenkins and Allison Bennett Oct. 12 (Bloomberg) -- The euro rose to three-week highs against the dollar and yen before European Commission President Jose Barroso presents proposals on recapitalizing banks after Germany and France pledged to draw up a plan by early November. New Zealand’s dollar rose the most in two months against the dollar as stocks and commodities advanced, buoying higher- yielding currencies. The euro extended its advance after European industrial production unexpectedly rose in August. The Serbian dinar gained on bets the nation will get positive news about its bid to become a candidate for European Union membership. “The market is quite a lot more risk-on today, with equities higher, and that’s reflected in the euro’s performance,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London. “With talk of recapitalization plans for the banks, we’ve got more certainty today than we had a week ago.” The euro strengthened 1.1 percent to $1.3786 at 8:48 a.m. New York time, after rising to $1.3816, the strongest level since Sept. 16. The 17-nation currency also gained 1.7 percent to 106.28 yen after reaching 106.34 yen, the most since Sept. 16. The dollar rose 0.7 percent to 77.18 yen. Barroso Speech Barroso will unveil proposals on coordinating bank recapitalizations across the EU, on Greece and private-sector participation in its bailout, and on the region’s rescue funds, according to a person who declined to be named because the proposals aren’t yet public. Barroso will announce the plan in a speech to the European Parliament in Brussels, the person said. “There’s been some short-covering in the euro over the past week,” said Lee Hardman, a foreign-exchange strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. That’s “driven by the hope that European authorities have finally woken up to the true extent of the crisis, which could result in more effective measures being put in place.” A short position is a bet that an asset will decline in value. The euro extended gains after the EU’s statistics office said industrial production in the euro area advanced 1.2 percent from July, the biggest increase since November 2010. Economists surveyed by Bloomberg forecast a drop of 0.8 percent. The euro may weaken toward $1.30 by year-end, Hardman said. “It looks like the euro-zone economy is heading into recession, and the U.S. economy is teetering on the brink. Those fundamentals haven’t changed,” he said. Risk On Futures Standard & Poor’s 500 Index climbed 0.7 percent. The S&P GSCI Index of 24 raw materials advanced for a sixth consecutive day, gaining 0.6 percent. The Dollar Index, which tracks the U.S. currency against those of six U.S. trading partners, slid 0.8 percent to 77.008. It earlier reached 76.796, the lowest since Sept. 21. Government bonds declined, with Germany’s 10-year bund falling for a sixth straight day, pushing the yield on the securities up seven basis points to the highest level since Sept. 1. The U.S. Treasury 30-year bond yield climbed eight basis points to 3.18 percent, the highest since Sept. 21. Australia’s dollar rallied 1.9 percent to $1.0136 U.S., and gained 2.7 percent to 78.33 yen. New Zealand’s dollar strengthened 1.8 percent to 79.40 U.S. cents, and appreciated 2.7 percent to 61.37 yen. Undervalued Yuan The U.S. Senate passed legislation yesterday punishing China for its undervalued currency, increasing concern that trade between the two nations will be hurt. U.S. lawmakers voted 63-35 to approve a measure that would let companies seek duties to compensate for a weak Chinese yuan. Governments that undervalue their currencies and don’t take corrective action would face penalties, including increased dumping duties and a ban on federal procurement in the U.S. Serbia’s dinar traded at 100.50 against the euro, up from the central bank’s official mid-rate of 101.2273 yesterday. The EU will release its 2011 enlargement report later today with new opinions on the progress made by Western Balkan countries toward membership in the world’s largest trading bloc. South Korea’s won fell from a two-week high after a government report showed foreign direct investment in the country fell last quarter. The Ministry of Knowledge Economy said foreign direct investment in the country dropped 24.6 percent from a year earlier to $2.21 billion, the first decline in a year. “The markets are swinging back and forth in tandem with progress or setbacks in Europe’s plans to stem the crisis,” said Park Joo Hyung, currency dealer at Korea Exchange Bank in Seoul. “The Slovakia rejection threw cold water on sentiment again. This, together with importers’ dollar demand, is driving the won lower.” The won weakened 0.2 percent to close at 1,166.85 per dollar after advancing to 1,160.80 yesterday, the strongest since Sept. 23. --With assistance from Gordana Filipovic in Belgrade. Editors: Paul Cox, Dave Liedtka To contact the reporters on this story: Keith Jenkins in London at kjenkins3@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

Source