Euro Gains as Draghi Sees Stability, Spanish Sale Exceeds Target

Jan. 12 (Bloomberg) -- The euro rose the most in a week as European Central Bank President Mario Draghi said he saw signs of stabilization in the economy and after Spain sold almost twice its maximum target at a note auction.

The 17-nation currency appreciated versus 13 of its 16 major counterparts as Italian borrowing costs dropped at a bill auction, spurring optimism the debt crisis is easing. The European Central Bank left its benchmark interest rate unchanged today. The Dollar Index pared losses after a U.S. report showed retail sales rose less than economists forecast, supporting investor appetite for the safety of the greenback.

“The euro is rising because Draghi is not as dovish as he could have been,” said Elizabeth Gregory, a market strategist at Swissquote Bank SA in Geneva. “Given the doom-and-gloom assessment of the euro zone within the media, his take on the situation is a lot more optimistic and balanced.”

The euro rose 0.6 percent to 98.24 yen at 9:11 a.m. in New York, the biggest intraday gain since Jan. 3. The common currency climbed 0.6 percent to $1.2787, after falling to $1.2662 yesterday, the lowest since September 2010. The dollar was little changed at 76.82 yen.

Speaking at a press conference in Frankfurt after the ECB’s decision, Draghi said, “according to some recent survey indicators there are tentative signs of stabilization of economic activity at low levels.” Policy makers left their benchmark rate at 1 percent, in line with the median forecast in a Bloomberg News survey.

Spain, Italy Sales

Spain sold 9.98 billion euros of notes, more than the maximum target of 5 billion euros set for the auction. It issued 4.27 billion euros of new benchmark three-year debt at an average yield of 3.384 percent, down from 5.187 percent at the previous offering on Dec. 1. Italy auctioned 8.5 billion euros of one-year bills at 2.735 percent, versus 5.952 percent at the prior sale on Dec. 12. It also auctioned 136-day securities.

“The Spanish action results are good,” said Jane Foley, a senior currency strategist at Rabobank International in London. “Not only did the government manage to shift more paper than it had indicated, but yields are lower on the three year,” which helps support the euro.

The euro strengthened earlier after a report showed industrial production in the euro-area declined by less than economists forecast.

Output fell 0.1 percent in November from the previous month, when it dropped a revised 0.3 percent, the European Union’s statistics office said. Economists forecast a decline of 0.3 percent, according to a Bloomberg News survey.

Dollar Index

The Dollar Index trimmed its decline after the Commerce Department said U.S. retail sales gained 0.1 percent last month, after rising a revised 0.4 percent in November. Economists forecast a 0.3 percent increase in December, according to a Bloomberg survey.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, fell 0.4 percent to 80.948.

The pound weakened versus the euro as the Bank of England’s Monetary Policy Committee held its key interest rate at 0.5 percent, in line with the forecast of all 53 analysts in a Bloomberg survey. The central bank kept its bond-buying target at 275 billion pounds ($421 billion).

“We expect the Bank of England to expand its quantitative- easing program, possibly next month, to support the economy,” said Ian Stannard, head of European currency strategy at Morgan Stanley in London.

Sterling declined 0.5 percent to 83.31 pence per euro. The currency was little changed at $1.5341 after falling to $1.5279, the weakest level since Oct. 6.

Aussie Gains

Australia’s dollar appreciated as optimism the Chinese government will take steps to spur growth boosted demand for the South Pacific nation’s assets.

Consumer-price inflation in China slowed to 4.1 percent in December from a year earlier, from 4.2 percent the previous month, the National Bureau of Statistics said today. The People’s Bank of China said in November it would cut the reserve requirement ratio for banks by 50 basis points, the first reduction since 2008. China is Australia’s top trading partner.

“Inflation is still cooling and that’s going to provide scope for Chinese authorities to support markets and the economies more,” said Jonathan Cavenagh, a currency strategist at Westpac Banking Corp. in Singapore. “Both the Aussie and kiwi still continue to do quite well against the U.S. dollar.”

The so-called Aussie gained 0.4 percent to $1.0350, and advanced 0.3 percent to 79.51 yen.

----With assistance from Anchalee Worrachate in London, Kristine Aquino in Singapore and Candice Zachariahs in Sydney. Editors: Nicholas Reynolds, Paul Dobson

To contact the reporters on this story: David Goodman in London at dgoodman28@bloomberg.net Keith Jenkins in London at kjenkins3@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

Euro Falls for First Week Since November on ECB Rate Outlook

The euro declined against the dollar for the first week since November on speculation a weakening economy will prompt the European Central Bank to cut borrowing costs further, reducing the currency’s appeal.

The pound slid to within 2 pence of parity with the euro and touched the lowest level in almost seven years with the dollar on speculation the recession in the U.K. will deepen. The greenback rose to a three-week high against the yen as a rally in stocks and an increase in Treasury yields from record lows encouraged investors to buy dollar-denominated assets.

“The pressure on the ECB to begin to lower rates below the 2 percent level is going to be immense,” said Boris Schlossberg, director of currency research in New York at GFT Forex, an online currency brokerage, in an interview on Bloomberg Radio. “Once that occurs, the pressure on the euro is really going to take shape.”

The euro fell 1.3 percent to $1.3855 yesterday from $1.4028 on Dec. 26, the first weekly decline since Nov. 21. It touched $1.3841 yesterday, the lowest level since Dec. 19, after dropping 4.2 percent last year. The dollar rose 1.6 percent to 92.28 yen from 90.81, following a 19 percent drop in 2008. The euro increased 0.3 percent to 127.81 yen from 127.40, after sliding 22 percent last year.

Mexico’s peso was the biggest loser against the dollar this week, dropping 2.1 percent to 13.7338, as a central bank report showed dollar flows from immigrant workers abroad declined in November.

U.K. Housing

Sterling declined 0.7 percent to $1.4484 against the dollar and was little changed at 95.61 pence per euro after the Bank of England reported yesterday that U.K. mortgage approvals slid in November to the lowest level since at least 1999. The pound fell to $1.4354 on Dec. 31, the lowest level since April 2002, and dropped to 98.03 pence per euro on Dec. 30, the weakest level since the single currency’s 1999 debut.

The Bank of England lowered the benchmark interest rate to 2 percent last month, its fifth rate cut in 2008. The central bank will cut its rate to 1.5 percent when it meets on Jan. 8, according to the median forecast of 50 analysts surveyed by Bloomberg.

The yen dropped 5.4 percent to 9.87 versus the South African rand and 5.1 percent to 65.48 versus the Australian dollar as the increase in stocks boosted speculation that investors will resume carry trades, in which they get funds in a country with low borrowing costs and buy assets where returns are higher. Japan’s 0.1 percent target lending rate compares with 4.25 percent in Australia and 11.5 percent in South Africa.

Stock Gains

The Standard & Poor’s 500 Index increased 6.8 percent this week after falling 38.5 percent in 2008, the biggest rout since the Great Depression. Ten-year note yields rose 0.27 percentage point to 2.40 percent.

The euro, which became the currency of Slovakia on Jan. 1, also fell against the dollar this week as a report showed yesterday that European manufacturing contracted in December at the fastest pace on record. An index based on a survey of purchasing managers by Markit Economics fell to 33.9 in December, the lowest level since the start of the data in 1998. A reading below 50 indicates a decline.

“It’s confirming everyone’s fear that the European economy continues to contract,” said Jessica Hoversen, a currency and fixed-income analyst at MF Global Ltd. in Chicago, who predicted the euro may fall in the first quarter below $1.30. “The ECB has no choice but to continue to cut rates. That’s negative for the euro.”

The ECB will lower its main refinancing rate from 2.5 percent to 1.5 percent by the second quarter of this year, according to the median forecast in a Bloomberg survey of analysts. The central bank cut the rate by 1.75 percentage points since October, the first reductions since June 2003.

Currency Trends

The moving-average convergence-divergence chart is showing a selling signal for the euro versus the dollar. The MACD index for the pair, or the difference between the 12- and the 26-day moving average, fell below the nine-day moving average yesterday for the first time since November, indicating the European currency’s rally starting last month may be over.

“Momentum funds are buying some dollars,” said Lee Wai Tuck, a currency strategist at Forecast Pte Ltd. in Singapore. “There are views that the dollar has been oversold.”

Zero interest rates in the U.S. may damp global demand for the greenback, hampering the government’s efforts to finance stimulus packages, some traders said.

The Federal Reserve cut its benchmark interest rate to a range of zero to 0.25 percent for the first time last month and shifted its focus to debt purchases to support the economy. The U.S. budget deficit swelled to $164.4 billion in November, official figures show.

“We will be testing the tops again at $1.43 to $1.45 in near term,” said C.J. Gavsie, managing director for foreign- exchange trading at BMO Capital Markets in Toronto, referring to the euro-dollar exchange rate.