Euro Gains on Speculation Draghi’s Plan Will Bolster Confidence

By Monami Yui and Mariko Ishikawa - Sep 4, 2012 12:41 PM GMT+0800

The euro gained against the yen on speculation European Central Bank President Mario Draghi’s plan to buy bonds of debt-saddled nations in the region will bolster confidence in the single currency.
The 17-nation euro rose versus most of its major peers and approached a two-month high against the dollar before European Union President Herman Van Rompuy meets with German Chancellor Angela Merkel today in Berlin for talks and Italian Prime Minister Mario Monti welcomes French President Francois Hollande to Rome. Australia’s dollar halted a decline from yesterday after the nation’s Reserve Bank left its benchmark interest rate unchanged at a developed-world high today.

“If the ECB really does buy bonds with up to a three-year maturity, that would be a positive surprise for the euro,” said Daisuke Karakama, a market economist in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan’s third-largest banking group by market value.
The euro advanced 0.3 percent to 98.87 yen at 1:37 p.m. in Tokyo. The shared currency added 0.2 percent to $1.2617, after it reached $1.2638 on Aug. 31, the highest since July 2. The yen slid 0.1 percent to 78.36 per dollar.

Australia’s currency added 0.1 percent to $1.0257, following a 0.7 percent drop yesterday. It fetched 80.37 yen, 0.2 percent above yesterday’s close.
Draghi told lawmakers he would be comfortable buying bonds with maturities of up to about three years, according to Jean- Paul Gauzes, a member of the European Parliament. Purchasing short-dated bonds doesn’t constitute state financing, Draghi said during a closed-door parliamentary session in Brussels yesterday, Gauzes told reporters afterwards.
The ECB is scheduled to hold a policy meeting on Sept. 6.

Short Sales

“There may be some short-covering of the euro amid growing expectations that the ECB will start a bond buying program,” said Akira Moroga, manager of forex product group, market products division at Aozora Bank Ltd. Short-covering is when investors end bets an asset will decline.
With the euro facing one of the most pivotal months in its 13-year history, traders and strategists are more divided than at any time since 2011 over whether officials will be able to keep the currency from tumbling.
At about $1.26, the 17-nation euro is 3.3 percent above the $1.22 median year-end estimate of more than 50 analysts compiled by Bloomberg, after the gap expanded to 3.8 percent last week. The last time the euro exceeded the consensus by that much was in July 2011, and it tumbled 9.4 percent in the next 10 weeks.

Currency Debasement

While traders are optimistic about Draghi’s bond-purchase plan, analysts said those same measures are more likely to debase the currency. After the ECB meets this week, Germany’s Constitutional Court will rule on the legality of a bailout fund, Greece’s institutional creditors will decide if the country merits access to aid that would help it stay in the EU, and Dutch citizens get to vote on parties including a group that wants exit the bloc.

“The ECB’s approach is obviously an easing approach,” Hans Redeker, the London-based head of currency strategy at Morgan Stanley, said in a telephone interview on Aug. 28. “The central bank is printing money and increasing the supply of euros, and this implies that the currency will stay weak.”
The euro has lost 4 percent so far this year, the worst performance among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen declined 3.1 percent, while the dollar dropped 1 percent.

The EU’s rating outlook was cut to negative by Moody’s Investors Service yesterday, reflecting the risks to Germany, France, the U.K. and the Netherlands that account for about 45 percent of the group’s budget revenue.
The Reserve Bank of Australia kept its overnight cash-rate target at 3.5 percent today. The decision to hold for a third straight meeting was predicted by all 24 economists surveyed by Bloomberg News.


To contact the reporters on this story: Monami Yui in Tokyo at myui1@bloomberg.net; Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net.
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net