The euro advanced from a three-week low against the dollar as stress-test results bolstered confidence in Spain’s banking system, adding to speculation the region is moving closer to resolving its debt crisis. The 17-member currency strengthened versus all but one of 16 major peers after Moody’s Investors Service said Spain’s bank recapitalization is positive for the nation’s credit rating. Results of stress tests as part of terms to win a European bailout showed Sept. 28 Spanish banks have a capital deficit less than previously estimated. The pound weakened as a report showed an index of U.K. manufacturing fell more than economists forecast in September. “Much of the negative news has been discounted and we’re in a position whereby the market is still very hopeful that we’re moving in Europe toward some more positive news with regards to Spain,� said Ian Stannard, head of European foreign- exchange strategy at Morgan Stanley in London. “The euro is going to be very well supported in this environment.� The euro advanced 0.3 percent to $1.2894 at 11:13 a.m. London time, after dropping as much as 0.4 percent to $1.2804, the weakest since Sept. 11. It strengthened 0.4 percent to 100.56 yen, also erasing a 0.4 percent decline. Japan’s currency was little changed at 77.99 against the greenback. Stannard sees “scope for a sizeable rebound� for the euro to around 104 yen and forecasts the shared currency will climb above $1.30 over the next two weeks. Stress Tests Spain commissioned the stress tests as part of terms to win external financial aid of as much as 100 billion euros for its banking system. They showed a deficit of 59.3 billion euros. Spain’s 10-year bonds rose for a third day, with the yield slipping five basis points, or 0.05 percentage point, to 5.89 percent. The euro advanced even after reports showed manufacturing in the region contracted for a 14th month in September and the unemployment rate reached the highest on record. A gauge of manufacturing based on a survey of purchasing managers was 46.1, above an initial estimate of 46 on Sept. 20, Markit said today. The index has held for 14 months below 50, indicating contraction, and fell as low as 44 in July. Unemployment was 11.4 percent in August, the same as in June and July after those months’ figures were revised higher, according to the European Union’s statistics office. Factory Output The pound depreciated against 14 of its 16 most-traded counterparts as a gauge of factory output, based on a survey by Markit Economics and the Chartered Institute of Purchasing and Supply, fell to 48.4 last month from a revised 49.6 in August. The median forecast of 29 economists in a Bloomberg News survey called for a reading of 49. Sterling weakened 0.1 percent to $1.6146 after reaching $1.6109, the lowest since Sept. 13. The pound was 0.4 percent weaker at 79.87 pence per euro. It appreciated to 79.24 pence on Sept. 27, the strongest since Sept. 6. Sweden’s krona is the best performer in a basket of developed-market peers since June, with a 3.11 percent advance, about twice that of the second-placed Norwegian krone. Strategists raised their estimates for the currency against the dollar by about 8 percent in less than three months as the central bank last month signaled that it sees no need to curb the krona’s advance. That’s in contrast to the dollar, which fell last quarter as Federal Reserve Chairman Ben S. Bernanke’s open-ended stimulus plan debased the currency, and the euro, which weakened amid a third year of debt turmoil. ‘Wind Behind’ Sweden’s krona was little changed at 6.5691 per dollar, after advancing 5.2 percent against the U.S. currency in the third quarter. It slipped 0.4 percent to 8.4707 per euro. “The krona can go a lot further,� John Taylor, the founder and chief executive officer of New York-based hedge fund FX Concepts LLC, which manages $3 billion, said in a Sept. 27 interview. “Sweden has the wind behind it because Bernanke is making the dollar go down and Europe keeps having these traumas.� The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, slid 0.2 percent to 79.748 after climbing earlier to 80.147, the highest since Sept. 11. The difference in the number of wagers by hedge funds and other large speculators on a decline in the U.S. Dollar Index compared with those on a gain -- so-called net shorts -- was 3,970 on Sept. 25 compared with a net long position of 4,896 a week earlier, according to figures from the Washington-based Commodity Futures Trading Commission. -- With assistance from Kristine Aquino in Singapore and Monami Yui in Tokyo. Editors: Keith Jenkins, Mark McCord To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net. To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net.

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