Euro Rises to Near Seven-Week High as Industry Decline Slows

By Ye Xie and Gavin Finch

July 24 (Bloomberg) -- The euro advanced to near a seven- week high against the dollar after reports showed the contraction in European manufacturing and services slowed more than forecast and German business confidence rose.

The 16-nation currency headed for a second weekly gain versus the dollar and yen as signs of global recovery bolstered demand for higher-yielding assets. Sterling fell the most in more than a week against the euro as a report showed Britain’s economy shrank more than twice as much as economists forecast.

“Momentum still favors the euro,” said Matthew Strauss, a senior currency strategist in Toronto at RBC Capital Markets Inc., a unit of Canada’s biggest bank by assets. “There are signs of improvement in the European economy, indicating the global recession is reaching bottom. The currency market still follows the broad development in risk sentiment.”

The euro climbed 0.4 percent to $1.4202 at 11:55 a.m. in New York, extending its advance this week to 0.7 percent. It touched $1.4291 yesterday, the highest level since June 3. The euro appreciated 0.2 percent to 134.57 yen from 134.30, increasing 1.3 percent over the past five days. The dollar dropped 0.2 percent to 94.77 yen from 94.92.

Europe’s currency traded within 3 cents above and below $1.40 since early June. The currency will oscillate at about $1.42 next week, according to Strauss.

The Norwegian krone and Canadian dollar were two of the best performers against the dollar and yen among major currencies today as crude oil prices rallied 5.8 percent this week to more than $67 a barrel.

Commodity Currencies

The krone advanced as much as 1.2 percent to 6.2190 per dollar and the Canadian currency gained as much as 0.8 percent to C$1.0795, the strongest levels since early June. Oil is among the biggest exports for both countries.

Eastern European currencies such as the Polish zloty will advance in the next two weeks as “hot money” flows into the region on signs of global economic recovery, according to David Woo, global head of foreign-exchange strategy at Barclays Capital in London. The zloty gained 3.2 percent this week to 4.1955 per euro for one of the best performances among emerging- market currencies.

“A lot of investors still sit on a lot of cash on the sideline,” said Woo in an interview on Bloomberg Television. “What you are seeing is basically people being forced to essentially put money to work.”

Total assets in U.S. money-market funds, among the safest investments, decreased to $3.66 trillion this week from $3.90 trillion in January, according to Washington-based Investment Company Institute. It’s still higher than $3.58 trillion in September, when Lehman Brothers Holdings Inc. collapsed.

European Industry

The euro advanced versus the dollar as Markit Economics said a composite index of the region’s manufacturing and services industries increased in July more than economists forecast to 46.8, representing the slowest pace of contraction in almost a year. A reading below 50 indicates a decline. The Ifo institute in Munich said its German business climate index rose to 87.3 this month, a nine-month high.

The euro pared its gain after U.S. stocks declined and the Reuters/University of Michigan final index of consumer sentiment dropped to 66 in July from 70.8 in the previous month.

Citigroup Inc. recommended its clients “take profit” on a bet that the Canadian dollar will gain further against the yen. The Canadian currency gained 10 percent to 87.85 yen in the past two weeks.

“It’s difficult to sustain the risk rally in light of the lack of pickup in economic data,” said Todd Elmer, currency strategist at Citigroup in New York, in an interview.

‘Better Levels’

Investors should look to re-enter the Canadian dollar-yen trade at “better levels” on renewed capital outflow from Japanese investors, strategists including Elmer wrote in a note to clients today.

The yen declined this week versus all of its 16 most-traded counterparts tracked by Bloomberg, dropping 5.3 percent to 12.727 versus the Swedish krona and declining 4.2 percent to 12.213 against the South African rand on speculation Japanese investors will buy overseas assets to obtain higher yields. Japan’s 0.1 percent target lending rate is among the lowest in developed nations.

Japanese financial companies prepared to raise at least 700 billion yen ($7.42 billion) for funds that will invest globally, according to data compiled by Bloomberg.

The pound dropped as much as 1.1 percent to 86.75 pence per euro in the biggest intraday decline since July 13 after a government report showed the U.K.’s gross domestic product contracted 0.8 percent in the second quarter. The median forecast of 32 economists surveyed by Bloomberg News was for a 0.3 percent decrease.

Outlook for Euro

The euro may rise to $1.4719, the strongest level since mid-December, should the currency advance above resistance at $1.4338, Bank of Tokyo-Mitsubishi UFJ Ltd. said.

The European currency already broke above the descending trend line of a triangle pattern, strengthening beyond the 76.4 percent retracement of the slump from the Dec. 18 high to the March 4 low, said Masashi Hashimoto, Tokyo-based senior analyst at the unit of Japan’s largest banking group. The triangle is formed by the descending trend line, which connects the highs of June 3 and July 1, and by an ascending trend line, which connects the lows of June 16 and July 8, he said.

To contact the reporters on this story: Ye Xie in New York at yxie6@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net
Last Updated: July 24, 2009 11:56 EDT