Euro Rallies to Two-Month High as German Survey Suggests Stronger Growth

By Catarina Saraiva and Anchalee Worrachate - Jan 22, 2011 6:18 AM GMT+0800

The euro rose against the dollar, reaching the strongest level in almost two months, as a report showed business confidence in Germany jumped last month, boosting optimism in the region’s economic recovery.

The common currency gained versus most of its major counterparts amid speculation that European policy makers will find a long-term solution to deal with the sovereign-debt crisis. Futures traders reversed bets the euro will decline against the dollar, calling for a gain in the shared currency for the first time since November. Currencies of commodity- exporting countries strengthened as stocks and raw materials prices advanced.

“The euro is well supported because it had very strong economic data,” said Kathy Lien, director of currency research at online currency trader GFT Forex in New York. “It takes the focus off the sovereign-debt worries.”

The euro rose 1.1 percent to $1.3621 at 5 p.m. in New York and reached $1.3625, the highest level since Nov. 23. The 17- nation currency gained 1.7 percent this week against the greenback. It added 0.6 percent to 112.48 yen. The dollar fell 0.5 percent to 82.57 yen.

The Standard & Poor’s 500 Index added 0.2 percent and the Thomson Reuters/Jefferies CRB Index of raw materials rose 0.6 percent.

German Reading

The Ifo Institute’s business climate index, based on a survey of 7,000 German executives, was 110.3 in January, up from the 109.9 median of 41 forecasts in a Bloomberg News survey. That’s the highest since records for a reunified Germany began in 1991.

European finance ministers are discussing whether the euro- region rescue fund should be able to provide credit to Greece to buy bonds from the secondary market at a discounted price, the Irish Times reported, citing a person it didn’t identify. The proposal was raised by the EU’s economic and financial committee on which euro zone finance officials sit, the Irish Times said, citing the person.

Positive data in Europe “is taken in the context of what to do about peripheral debt issues,” saidJack Spitz, managing director of foreign exchange at National Bank of Canada in Toronto. “The data may be strong in areas of the euro zone that continue to be seen as the givers rather than the takers. It speaks to the dichotomy.”

Futures Bets

Figures from the Washington-based Commodity Futures Trading Commission show the difference in the number of wagers by hedge funds and other large speculators on an advance in the euro compared with those on a drop -- so-called net longs -- was 4,109 on Jan. 18, compared with net shorts of 45,182 a week earlier.

U.K. retail sales fell 0.8 percent in December from the previous month, when they rose 0.4 percent, the Office for National Statistics said today in London. The median forecast of 22 economists in a Bloomberg News survey was for a 0.2 percent decline.

Inflation in the U.K. jumped to 3.7 percent last month, the fastest pace since April, the Office for National Statistics said earlier this week.

Bank of England policy maker Adam Posen dismissed the recent burst of inflation as temporary, indicating he may keep pushing for more stimulus to aid the economic recovery.

U.K. Prices

“In terms of underlying U.K. inflation, driven by domestic forces, my position is unchanged,” Posen said in an interview in his office in London today. “Inflation will be well below” the bank’s 2 percent target, he said, citing spare capacity and the likelihood that budget cuts will hurtconsumer spending.

The pound had dropped 0.9 percent this week, trading at 85.13 pence per euro. The British currency added 0.7 percent to $1.6000 today.

Canada’s dollar strengthened as the nation’s retail sales advanced 1.3 percent, the sixth increase in a row and the biggest since March. The Canadian dollar added 0.4 percent to 99.31 cents perU.S. dollar.

The Swiss franc gained 0.9 percent to 95.84 per dollar. It dropped 0.2 percent to 1.3055 per euro.

Swiss central bank President Philipp Hildebrand said the franc’s ascent is curbing exports and hampering the country’s economic recovery.

The “clear appreciation of the Swiss franc over the last months” poses a “major burden for parts of our economy,” Hildebrand said late yesterday at an event in Zurich. “Not least because of the franc’s gains, the Swiss National Bank expects a notable slowdown in economic growth” this year.

The currency has appreciated 13 percent against the euro over the past year as investors sought a safe haven from euro- area fiscal problems.

Brazil’s central bank placed all 20,000 reverse currency swap contracts offered today as policy makers tried to curb the real’s gains by making bets against it in the futures market for the second time in as many weeks.

Policy makers under central bank President Alexandre Tombini have stepped up efforts to curb gains in the real, which has appreciated 39 percent against the dollar since the start of 2009, the most among 25 emerging-market currencies tracked by Bloomberg.

The real dropped 0.3 percent to 1.6777 per dollar.

To contact the reporters on this story: Catarina Saraiva in New York atasaraiva5@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net.

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net