Euro Rises to 4-Month High as Court Clears Bailout Path

The euro rose to its highest level in four months against the dollar after a German court cleared the way for ratification of Europe’s permanent bailout fund, boosting demand for the shared currency.
The 17-nation euro rose for a second day versus the yen as the court dismissed motions seeking to block the fund, while setting a cap of about 190 billion euros ($245 billion). The dollar fell versus most of its 16 major peers before the Federal Reserve starts a two-day meeting today amid bond-purchase speculation. South Africa’s rand weakened to its lowest level of the year against the euro as domestic labor tensions escalated.

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Sept. 12 (Bloomberg) -- Hans-Guenter Redeker, head of currency strategy at Morgan Stanley, discusses the outlook for the euro following the decision by Germany's top constitutional court to reject bids to halt ratification of the 500 billion-euro ($644 billion) European Stability Mechanism. Redeker talks with Guy Johnson on Bloomberg Television's "The Pulse." (Source: Bloomberg)

“The German constitutional court decision was widely anticipated, but it was yet another hurdle cleared in easing the stresses in peripheral markets, which were responsible for a lot of the euro’s losses in the first half of the year,” Robert Lynch, head of currency strategy for HSBC Holdings Plc in New York, said in an interview on Bloomberg Television’s “Lunch Money” with Sara Eisen.
The euro appreciated 0.3 percent to $1.2891 at 1:26 p.m. in New York after rising to $1.2937, the strongest since May 11. The common currency gained 0.4 percent to 100.41 yen. The yen fell 0.2 percent to 77.89 per dollar, after reaching the strongest level yesterday since June 1.

German Courts

The German announcement “helps erase a key source of uncertainty for the single currency,” Joe Manimbo, a market analyst in Washington at Western Union Business Solutions, a unit of Western Union Co. (WU), said in a telephone interview. “Adding to the euro’s firmer tone is expectation that the Fed is only days away from employing more stimulus.”
The rand reached its lowest level against the euro since Dec. 21 after mediators failed to persuade striking worker representatives to return to their jobs and begin wage talks. The strike may spread to surrounding mines, which may drive platinum futures to a record high.
The rand lost 1.9 percent to 8.3374 per dollar after falling earlier as much as 2.6 percent, its biggest drop since May 30. The South African currency declined 2.2 percent to 10.7493 per euro after falling as much as 2.8 percent.
The Australian dollar rose to a three-week high versus the greenback amid Fed stimulus speculation and after Premier Wen Jiabao signaled China has room to add economic stimulus.

China Plan

“Be it monetary or fiscal, we still have ample strength,” Wen said at the World Economic Forum in Tianjin yesterday. A fiscal stabilization fund of 100 billion yuan ($15.8 billion) is available for “preemptive” measures, he said. China is Australia’s biggest trading partner.
The Australian currency gained 0.2 percent to $1.0456 after reaching $1.0506, the strongest level since Aug. 23. The so- called Aussie climbed 0.4 percent to 81.44 yen.
Britain’s pound pared earlier gains versus the dollar after a report showed the U.K. unemployment rate unexpectedly rose in July. The jobless rate rose 8.1 percent in the three months through July, from 8 percent in June, while a Bloomberg News survey forecast no change.
Sterling gained 0.2 percent to $1.6109 after rising 0.4 percent earlier to its highest level since May 11.
All other countries in the euro area had already ratified the European Stability Mechanism when the German court announced its decision. The ESM is a 500 billion-euro fund that offers loans to euro-zone members and may buy their bonds to lower borrowing costs.

Euro’s Month

The euro has strengthened 3.1 percent in the past month the best performer of the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar dropped 2.2 percent and the yen weakened 1.6 percent.
Japanese Finance Minister Jun Azumi said moves in the yen yesterday were speculative and the government was ready to act against unacceptable changes in the currency’s value.
“The yen’s move from yesterday has been clearly speculative, and we won’t accept such moves,” Azumi told reporters in Tokyo after the yen gained 0.7 percent yesterday. “We will definitely take bold actions if needed.”
The yen has climbed more than 7 percent against the dollar since mid-March and any further monetary loosening in the U.S. has the potential to fuel further gains.
The Fed is projected to announce a third round of bond purchases tomorrow, according economists in a Bloomberg survey, while also extending the duration of its zero-interest-rate policy into 2015. Two rounds of purchases totaling $2.3 trillion have failed to revive the labor market, which Fed Chairman Ben S. Bernanke said last month is a “grave concern.”
Moody’s, which placed a negative outlook on the U.S.’s Aaa rating in August 2011, said in a statement yesterday the ranking would probably be cut to Aa1 if no policy is passed to address mounting debt levels.

’Least Favored’

“The dollar is the least favored currency,” said Stuart Frost, a fund manager at RWC Partners Ltd. in London, which oversees $4 billion. “There will be hints of QE from the Fed. The message will be there is a possibility of QE3 in the future but not at this stage. It will be extremely dovish.”
Frost would consider buying the dollar if it weakens to $1.30 per euro, he said.
The Dollar Index (DXY), which IntercontinentalExchange Inc. uses to track the greenback against those of six U.S. trading partners, dropped 0.2 percent to 79.729.
Downside risks remain intact since the dollar gauge has fallen below the key zone between 79.74 and 80, according to JPMorgan Chase & Co. The index has a deeper target of 78.60, the six-month low it reached in May, Niall O’Connor, a New York- based technical analyst at the firm, wrote today in a note to clients.