Euro Advances as Report Shows German Factory Orders Gained

By Ye Xie and Oliver Biggadike

July 7 (Bloomberg) -- The euro rose from near a two-week low against the dollar and advanced versus currencies including the pound and rand after a government report showed German factory orders increased the most in almost two years in May.

“There’s no question it was a very positive surprise,” Lutz Karpowitz, a currency strategist at Commerzbank AG in Frankfurt, said of the German factory report. “It indicates at least that the recovery is proceeding.”

Sterling fell against the dollar for a fourth day in its longest stretch of declines since April after the British Chambers of Commerce recommended that the Bank of England expand its asset-purchase program to revive the economy. The yen approached the strongest level versus the dollar in more than a month on speculation a drop in U.S. stocks will prompt Japanese investors to sell overseas assets and take money home.

The euro traded at $1.3961 at 11:40 a.m. in New York, compared with $1.3984 yesterday, when it reached $1.3877, the lowest level since June 23. The euro decreased 0.4 percent to 132.77 yen from 133.34. The dollar lost 0.2 percent to 95.12 yen from 95.35 after sliding to 94.67 yesterday, the lowest level since June 1.

Sterling fell 0.7 percent to $1.6167 and dropped 0.8 percent to 86.49 pence per euro on speculation new efforts to stimulate Britain’s economy will debase the currency.

An economic recovery “is not guaranteed,” and the central bank should extend its quantitative-easing program to the full 150 billion pounds ($243 billion) and seek permission to spend more, said the British Chambers of Commerce, a business lobbying group, in a report today. BOE policy makers next meet July 9.

‘A Sterling Negative’

“Discussions of extending the quantitative-easing program beyond the 150 billion pounds is a sterling negative if you take the view that printing money is a way of cheapening the currency,” said Jeremy Stretch, a senior strategist at Rabobank International in London. “The probability that they will extend the program is reasonably significant.”

The pound also weakened after an Office for National Statistics report showed factory production unexpectedly fell in May for the first time in three months.

The euro appreciated 1 percent to 11.0407 Swedish kronor and advanced 0.7 percent to 11.1792 South African rand after the Economy Ministry in Berlin said German factory orders increased 4.4 percent from April, the biggest gain since 2007.

The yen advanced versus all of the 16 most-traded currencies tracked by Bloomberg, rising 1.4 percent to 12.04 versus the krona and 0.9 percent to 11.91 against the rand after the Standard & Poor’s 500 Index slid 1.1 percent.

‘Mixed Data’

“The major driver in the market is uncertainty,” said Ron Leven, executive director at Morgan Stanley in New York. “We get a lot of mixed data. We need a string of numbers to convince the market where we are headed.” Leven favors the yen, Canadian dollar and Norwegian krone.

The dollar traded within 3 cents above and below $1.40 versus the euro in the past month as investors debated whether the global economic recovery is sustainable.

One-month implied volatility on euro-dollar options decreased to 12.15 percent, near the lowest level since September 2008, when Lehman Brothers Holdings Inc. collapsed. Lower implied volatility reflects traders’ expectations for currency swings to diminish in the coming month. Traders use volatility to price options.

Citigroup’s Outlook

Citigroup Inc. urged its clients to continue using options to bet volatility on the euro versus the Polish zloty will decline as the International Monetary Fund’s aid for Poland reduces the need for companies to hedge their currency exposure. The one-month implied volatility on the pair dropped to 15.2 percent from about 30 percent at the end of 2008.

“The increased global appetite for emerging-market currencies have contributed in lessening the risk” premium for currency options, Citigroup strategists including New York-based Todd Elmer wrote in a research note today.

Investec Asset Management Ltd., which manages $50 billion in assets, has been “underweight the dollar” because of the U.S. trade and fiscal deficit, according to Thanos Papasavvas, London-based head of currency management at the firm.

“In terms of the fundamental factors within the U.S. economy, they are quite negative in terms of twin deficits,” said Papasavvas in an interview on Bloomberg Television.

The U.S. should consider drafting a second stimulus package focusing on infrastructure projects because the first plan was “a bit too small,” said Laura Tyson, an economic adviser to President Barack Obama.

‘Sicker Patient’

The current plan “will have a positive effect, but the real economy is a sicker patient,” said Tyson, stressing that she was speaking for herself and not the administration, in a speech in Singapore today. The $787 billion package will have a bigger effect in the third and fourth quarters, she said.

The euro may fall to a three-week low against the dollar of about $1.3750 this month after the currency dropped below so- called support at about $1.4075, according to Bank of Tokyo- Mitsubishi UFJ Ltd., citing trading patterns.

Support at that level represented an ascending trend line that connected the lows of April 22 and 28, June 23 and July 2, according to Masashi Hashimoto, a Tokyo-based currency analyst at Bank of Tokyo. Support is a level where buy orders may be clustered.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Anchalee Worrachate in London at aworrachte@bloomberg.net

Last Updated: July 7, 2009 11:43 EDT