Euro Gains Versus Dollar on Summit Outlook, ECB Rate Increase Speculation

By Allison Bennett and Emma Charlton - Mar 24, 2011 9:48 PM GMT+0800

The euro advanced against the dollar for the first time in three days as European Union leaders began a two-day meeting on measures to contain the region’s sovereign debt crisis.

The 17-nation currency gained against the yen as speculation the European Central Bank is poised to raise borrowing costs outweighed fiscal turmoil. The euro fell earlier against the dollar and yen as Moody’s Investors Service cut the ratings of 30 Spanish banks and after Portugal’s Prime Minister Jose Socrates resigned yesterday. Currencies linked to commodities surged as raw material prices rallied as allied forces intensified attacks in Libya.

“The euro is in a tug-of-war between relatively strong economic data and the pretty strong belief that the ECB will raise rates soon against the lingering unresolved sovereign debt crisis,” said Boris Schlossberg, director of research at online currency trader GFT Forex in New York. “The European economic data continues to show strength in the core, which gives the market an enormous amount of confidence that the ECB will raise rates. The euro is really trading right now off interest rate differentials.”

The euro appreciated 0.3 percent at $1.4123 at 9:43 a.m. in New York, from $1.4088 yesterday, erasing a 0.2 percent drop. The euro touched $1.4249 on March 22, matching the level on Nov. 5. The currency appreciated 0.3 percent to 114.30 yen, from 114 yen, after declining 0.4 percent. The dollar was at 80.93 yen, compared with 80.92.

Economic Data

The dollar remained lower against the euro after U.S. government reports showed durable goods unexpectedly declined in February and jobless claims declined last week.

The Dollar Index, which tracks the currency against six major trading partners was little changed at 75.819 as two European officials said a bailout for Portugal may total as much as 70 billion euros ($99 billion). The gauge is weighted 57.6 percent to movements in the euro.

Portugal hasn’t asked for a bailout and the figures are preliminary, the officials said. The action would follow Greece and Ireland’s request of aid from the European Union and theInternational Monetary Fund.

Greece accepted a $110 billion-euro aid package from the EU and IMF in May 2009 and Ireland accepted an 85 billion-euro bailout fund in November.

Economic Size

Portugal made up about 1.8 percent of the total 17-nation euro-zone gross domestic product in the fourth quarter last year, according to Eurostat, the European Union’s statistics office, and Bloomberg data, while Ireland accounts for 1.8 percent and Greece makes up 2.3 percent.

Spain, which investors have also speculated may need a bailout, accounts for 10.1 percent of the region’s gross domestic product. Germany, the largest member, contributes 30 percent to the area’s economy and France, the second-largest nation, accounts for 21 percent of GDP.

“The European leaders are gradually putting in place the right measures to try to stabilize the debt problem in Europe, and that is helping to ease some of the downside risks and encouraging longer-term investors,” said Lee Hardman, a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. inLondon. “Euro-dollar is likely to try to grind higher.”

Spanish Banks

Moody’s cut the ratings of 30 Spanish banks by at least one step after Spain’s sovereign downgrade, the company said in an e-mailed statement today.

Spain, whose credit rating was lowered to Aa2 by Moody’s on March 10, is implementing the deepest austerity measures in at least three decades to convince investors it can bring its debt burden under control.

The pound weakened 0.5 percent to $1.6153 as a report showed U.K. retail sales dropped in February more than economists forecast after a surge in the previous month, when shoppers boosted spending to beat a tax increase.

Sales fell 0.8 percent last month after an increase of 1.5 percent in January, the Office for National Statistics said. The median forecast of 24 economists in a Bloomberg News survey was for a 0.6 percent drop.

New Zealand’s dollar advanced against all of its major counterparts after the government said the economy grew in the fourth quarter, avoiding a recession. New Zealand’s currency jumped 0.9 percent to 74.75 U.S. cents and rallied 1 percent to 60.51 yen.

New Zealand Growth

Gross domestic product expanded 0.2 percent in the three months ended Dec. 31 after contracting 0.2 percent in the previous quarter, Statistics New Zealand said. The median forecast of 14 economists was for a 0.1 percent increase.

“The GDP report has been taken well by the market, which was nervous about a negative number,” said Sean Callow, a senior currency strategist at Westpac Banking Corp. in Sydney. “The kiwi will do reasonably well against the U.S. dollar as risk appetite is proving to be quite resilient.”

The Canadian dollar and Norwegian krone rose against the dollar as crude oil advanced for a fourth day amid heightened concerns about Middle East exports.

Canada’s currency rose 0.5 percent to 97.70, from 98.16 cents, as crude oil in New York jumped as much as 0.9 percent to $106.45 a barrel. The krone advanced 0.5 percent to 5.5842 per dollar.

To contact the reporter on this story: Allison Bennett in New York atabennett23@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net

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