The euro gained versus the dollar, extending a second weekly advance, after a report showing German exports rose the most in five months boosted bets that policy makers will lift interest rates further to curb inflation. The currency shared by the 17 euro-region members appreciated against most of its major peers. The European Central Bank yesterday raised its main refinancing rate to 1.25 percent from a record-low 1 percent and left the door open for further increases. The yen slumped to an 11-month low against the euro on expectations Japan will keep borrowing costs near zero as its economy recovers from last month’s earthquake. South Africa’s rand reached a three-month high against the dollar. The Swedish krona gained against all 16 of its major peers. “You can’t ignore the yield story with the euro,” said Chris Walker, a foreign-exchange strategist at UBS AG in London. “The incentive for the ECB to raise rates is going to keep the euro supported. The main justification for rate hikes in the euro zone has been that the German economy is motoring ahead.” The euro appreciated as much as 0.8 percent to $1.4422 and traded 0.7 percent stronger at $1.4410 as of 6:44 a.m. in New York, extending its advance this week to 1.2 percent. The yen declined 1.2 percent to 122.96 per euro, the weakest since May, before trading at 122.88. Japan’s currency lost 0.4 percent to 85.26 per dollar. German Exports Europe’s currency has rallied 7.6 percent against the dollar this year as economic growth in Germany and accelerating consumer prices in the euro region boosted expectations that interest rates will need to rise to curb inflation, which reached a two-year high of 2.6 percent in March. A report today showed German exports jumped 2.7 percent in February from a month earlier, when they dropped 1 percent. That was the biggest month-on-month increase since September and above the 2 percent median estimate in a Bloomberg survey. The ECB’s decision to raise its main rate yesterday comes as the central banks of other developed nations, including the U.S. and Japan, keep borrowing costs near zero to support their economies as they recover from the financial crisis. The Federal Reserve is not expected to raise its target funds rate until the first quarter of 2012 and the Bank of Japan will probably keep borrowing costs on hold for the next 12 months, the median estimates in two Bloomberg surveys show. The yen headed for a fourth weekly drop versus the euro, the longest losing streak in 20 months, on speculation the Bank of Japan will continue with accommodative monetary policy to help its economy recover from a record earthquake on March 11. The BOJ yesterday unveiled a 1 trillion yen, one-year loan program to companies affected by the quake and tsunami as board members downgraded their economic assessment for the first time since October. ‘Improved Risk Sentiment’ “Improved risk sentiment on the back of the global recovery is pushing the euro higher against the yen and dollar, especially now the market is convinced there will be further rate increases by the ECB,” said Hitoshi Asaoka, senior strategist at Mizuho Trust & Banking Co. in Tokyo, a unit of Japan’s second-largest bank. The ECB will raise its benchmark rate by 133 basis points over the next 12 months, compared with a prediction for 44 basis points of increases at the end of last year, a Credit Suisse Group AG index based on swaps showed. “We will continue to do in the future” what is appropriate “to ensure price stability,” ECB President Jean- Claude Trichet said at a press conference in Frankfurt yesterday, following the announcement of the rate increase. ‘Broad Dollar Weakness’ The yen has weakened 5.7 percent in the past month, the biggest drop among the 10 most widely traded currencies tracked by Bloomberg Correlation-Weighted Indexes. The euro has gained 1.4 percent, according to the measure. The Dollar Index, which InterContinentalExchange Inc. uses to track the greenback versus the currencies of six major trading partners, including the pound and Canadian dollar, sank to as low as 75.10, the least since December 2009. “We are looking at broad-based dollar weakness,” said Neil Mellor, a currency strategist at Bank of New York Mellon Corp. in London. “It’s very clear U.S. rates aren’t going anywhere very fast. There’s ample liquidity looking for a home.” The pound strengthened against the dollar, extending a weekly advance, after a report showed producer prices increased more than economists forecast last month, strengthening the case for higher interest rates to curb inflation. The Bank of England kept its key rate at a record low of 0.5 percent yesterday. Aussie Bets Sterling gained 0.4 percent to $1.6382, after climbing to $1.6428, the strongest level since Jan. 19, 2010. The pound lost 0.3 percent 87.93 pence per euro. Sweden’s krona was the best performer against the euro, among the 16 major currencies tracked by Bloomberg, adding 0.6 percent to 8.9851. The krona appreciated 1.2 percent versus the dollar to 6.2397. Traders boosted bets on the amount of interest rate increases by the Reserve Bank of Australia over the next 12 months to 30 basis points, from 18 basis points at the end of last week, according to a Credit Suisse Group AG index. “Any dips in Aussie and kiwi are going to be quite shallow because these remain the most attractive currencies to put on carry trades,” said Todd Elmer, the Singapore-based head of Group-of-10 currency strategy for Asia ex-Japan at Citigroup Inc. “We’re likely to see significant appreciation in these currencies, which for Aussie should take us up toward $1.10.” Australia’s dollar gained 0.6 percent to $1.0529, after earlier rising to $1.0540, the highest since it was freely floated in 1983. To contact the reporter on this story: Garth Theunissen in London gtheunissen@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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