BS: Dollar, Yen Weaken Before Merkel, Lagarde Meet; Aussie Gains
By Allison Bennett and Keith Jenkins
Jan. 10 (Bloomberg) -- The dollar and yen weakened against higher-yielding currencies before Germany’s chancellor meets with the International Monetary Fund’s managing director amid signs European leaders are taking steps to end the debt crisis.
The U.S. currency declined the most versus Brazil’s real and Australia’s dollar as U.S. stock futures and European equities advanced, damping demand for safer investments. Implied volatility for currencies of advanced economies fell to a six- month low. The euro gained versus the dollar on speculation investors pared bets the 17-nation currency will weaken.
“We’re seeing some strength in risk currencies, such as the Australian and New Zealand dollars,” said Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in London. “The momentum in the euro is pretty strong as people are covering short positions,” he said, referring to investors ending bets the shared currency will decline.
The dollar dropped 0.2 percent to $1.2788 per euro at 9:21 a.m. in New York after weakening 0.4 percent yesterday. The yen declined 0.2 percent to 98.28 per euro. The dollar was little changed at 76.86 yen.
The implied volatility of three-month options for Group of Seven currencies fell to 10.7 percent, according to a JPMorgan Chase & Co. index, the lowest level on an intraday basis since July 11. Reduced volatility indicates less probability of currency fluctuations that may erode profit on investments in higher-yielding assets.
Commodity Currencies
Brazil’s real gained 1.7 percent to 1.8030 versus the dollar and touched 1.7950, its strongest level in a month. Australia’s dollar advanced 0.9 percent to $1.0334, and New Zealand’s currency rose 0.9 percent to 79.41 U.S. cents.
The Standard & Poor’s GSCI Index of 24 raw materials climbed 1.1 percent. Futures on the Standard & Poor’s 500 Index advanced 1.12 percent. and the MSCI World Index of stocks gained 0.8 percent.
The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, fell 0.2 percent to 80.825 after rising to 81.503 yesterday, the highest since September 2010.
German Chancellor Angela Merkel said Greece would be the focus of talks when she meets IMF Managing Director Christine Lagarde today in Berlin. “We want Greece to stay in the euro,” Merkel said in a joint press conference with French President Nicolas Sarkozy after the two leaders met yesterday.
The euro strengthened yesterday as Merkel and Sarkozy discussed a rulebook for closer fiscal union within the euro area amid record bets the euro would decline against the dollar. The region’s leaders may complete the guidelines by Jan. 30, one month ahead of schedule.
‘Positioning So Extreme’
Futures traders increased their bets earlier this month to a record high that the euro will decline against the dollar. The difference between wagers that the shared currency would fall versus those that it would rise surged to 138,909 in the week ended Jan. 3, according to data from the Commodity Futures Trading Commission released Jan. 6.
“When you have speculative positioning so extreme against the euro, you’re going to be exposed to these sorts of corrections higher in euro-dollar,” said Tom Levinson, a currency strategist at ING Groep NV, by phone today from London. “The market is never going to get tired of thinking something exciting and positive might come out of a meeting between two leading politicians. Our general view is that, that’s up against what’s going to be a pretty tough few months for the euro.”
ING has a $1.20 forecast for the euro by the end of the first quarter.
Forint Strengthens
The Hungarian forint gained as Hungary’s chief negotiator traveled to Washington to prepare official negotiations with the IMF on a bailout package.
Hungary’s currency advanced 1 percent to 312.59 per euro after weakening to a record 324.24 last week.
The euro has declined 1.4 percent this year according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar is little changed, and the yen has advanced 0.1 percent.
UBS AG recommended selling the euro at $1.2755 on expectations the ECB will cut its key rate to 0.5 percent by the end of the first quarter.
“We have gone short euro-dollar at $1.2755 as a trade recommendation, with a stop at $1.3050 and target of $1.2250,” strategists Mansoor Mohi-uddin in Singapore and Geoffrey Yu in London wrote today in an e-mailed report.
Swiss Franc
The Swiss franc touched a three-month high amid speculation traders will challenge the central bank’s efforts to limit the currency’s rally following the resignation of Chairman Philipp Hildebrand.
The Swiss National Bank’s supervisory board holds an extraordinary meeting in Zurich today. A successor to Hildebrand will be named as soon as possible, Hansueli Raggenbass, head of the council, said in an interview. The central bank imposed a ceiling on the franc on Sept. 6, saying it wouldn’t allow the currency to strengthen beyond 1.20 per euro.
The resignation and growth in the SNB’s reserves may strengthen the view that it will be “harder for the SNB to defend the peg if the situation in the euro zone deteriorates,” Valentin Marinov, a foreign-exchange strategist at Citigroup Inc. in London, wrote in a note to clients. “We doubt that the peg will be threatened, but we suspect that euro-franc could trade very close to the 1.20 mark.”
The franc slipped 0.2 percent to 1.2141 per euro after earlier rising to 1.2107, the strongest since Sept. 20.
--With assistance from Chris Fournier in Halifax, Nova Scotia, and Kristine Aquino in Singapore. Editors: Greg Storey, Paul Cox
To contact the reporters on this story: Allison Bennett in New York at abennett23@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
