BLBG:Euro Strengthens Before This Week’s European Summit; Yen, Dollar Decline Q
The euro advanced, extending last week’s gains versus the dollar and yen, as Italy’s cabinet approved a plan to cut its deficit before a European summit on the region’s sovereign debt crisis.
The 17-nation currency appreciated against most of its 16 major counterparts after people familiar with the negotiations said a proposal to channel European Central Bank loans through the International Monetary Fund may deliver as much as 200 billion euros ($269 billion) to fight the crisis. The yen and dollar weakened as European stocks gained, damping demand for safer investments. The Swiss franc fell for a fourth consecutive day against the euro.
“The euro is benefiting from a general bid for risk,” said Adam Cole, global head of foreign-exchange strategy at RBC Europe Ltd. in London. “The news from Italy helped with the positively received budget package and austerity measures. The euro feels slightly better bid today.”
The euro rose 0.4 percent to $1.3441 at 7:12 a.m. New York time after gaining 1.2 percent last week. The 17-nation currency climbed 0.4 percent to 104.88 yen. The dollar was little changed at 78.02 yen.
German Chancellor Angela Merkel is scheduled to meet French President Nicolas Sarkozy to work on a plan for stricter enforcement of the region’s deficit rules. European Union leaders will hold a summit in Brussels this week.
Monti Plan
Italian Prime Minister Mario Monti announced 30 billion euros of austerity and growth measures yesterday. The premier will present the package, which includes a tax on luxury goods, resurrects a property levy on first homes, and forces many workers to delay retirement. The proposal will go before both houses of parliament today.
At a Nov. 29 meeting attended by ECB President Mario Draghi, euro-area finance ministers gave their approval for work on a plan to recycle national central bank funds through the IMF, said two people who declined to be named because the talks are at an early stage. The funds may be used to underwrite precautionary lending programs for Italy or Spain, the people said.
“Policy makers working together rather than working against each other,” may underpin the euro, according to RBC’s Cole. “This may be a positive development” for the common currency, he said.
The Stoxx Europe 600 Index advanced 0.9 percent and Standard & Poor’s 500 Index (SXXP) futures expiring in December gained 1.1 percent.
ECB Rates
The ECB will cut its benchmark interest rate to 1 percent from 1.25 percent when it meets Dec. 8, according to the median estimate of economists surveyed by Bloomberg News.
A rate cut “would likely spark a rally in the euro first as investors reward the central bank for taking a proactive stance,” Mansoor Mohi-uddin, Singapore-based head of foreign exchange strategy at UBS AG, wrote in a note to clients.
The euro will then decline as investors weigh further ECB action as the euro-area economy deteriorates, he wrote. UBS forecasts the currency will drop toward $1.20 next year.
A second estimate of the euro region’s gross domestic product will show the economy expanded 0.2 percent in the third quarter, according to a separate Bloomberg survey before tomorrow’s report. That’s the same rate as the prior three months.
Growth in German factory orders slowed to 1.9 percent in October from a year earlier, after gaining 2.4 percent in the previous month, a Bloomberg survey showed before the data is released tomorrow.
Euro Shorts
“There’s a material chance of a recession in Europe,” said Michael Turner, a fixed-income and currency strategist at Royal Bank of Canada in Sydney. “In light of looser monetary policy, a pretty weak growth outlook next year and some particularly tight fiscal policy, the decline in euro has been pretty consistent.”
Hedge funds and other large speculators increased bets the euro will decline against the dollar, figures from the Commodity Futures Trading Commission showed. The difference in the number of wagers on a decline in the euro compared with those on a gain -- so-called net shorts -- was 104,302 on Nov. 29, the most since June 2010, compared with net shorts of 85,068 a week earlier.
The euro is “a much less attractive reserve story,” RBC’s Turner said. “It’s hard to see the demand for dollars dropping off over the next year.”
The Swiss franc weakened against the euro on speculation that the nation’s central bank will lower the ceiling on the currency’s exchange rate.
The Swiss government said last week it is willing to “examine the feasibility of supporting measures,” including negative interest rates, to aid the central bank in its defense of a 1.20 ceiling versus the 17-nation currency.
The Swiss National Bank said on Sept. 6 it would sell “unlimited quantities” of the currency to maintain an exchange rate limit of no stronger than 1.20 francs per euro.
The franc depreciated 0.3 percent to 1.2380 per euro and was little changed at 92.12 centimes per dollar.
To contact the reporters on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net; Kristine Aquino in Singapore at kaquino1@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
