Euro Rises From Almost 3-Week Low Before ECB Meeting; Yen Climbs

The euro rose for a second day against the dollar, reversing earlier losses, after failing to drop below its 50-day moving average.

The 17-nation currency advanced from almost a three-week low after resisting a decline below the $1.2993. The euro fell earlier before the European Central Bank meets this week amid concern the region’s economy is faltering. The yen strengthened from almost the weakest level in 29 months against the dollar even amid speculation Japan’s government will announce additional stimulus measures.

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Jan. 4 (Bloomberg) -- Adam Cole, head of global currency strategy at Royal Bank of Canada, discusses the U.S. budget deal and efforts by Japanese Prime Minister Shinzo Abe to weaken the yen. He speaks from London with Mark Barton on Bloomberg Television's "Countdown." (Source: Bloomberg)

“The euro simply didn’t break much lower and stayed quite nicely around the $1.30 level,” Sebastien Galy, a senior foreign-exchange strategist at Societe Generale SA in New York, said in a “Bloomberg on the Economy” radio interview with Sara Eisen and Scarlet Fu. “The temptation therefore is to try to push it a little bit higher.”

The euro appreciated 0.2 percent to $1.3101 at 12:24 p.m. New York time after falling earlier to $1.3017. It touched $1.2998 on Jan. 4, the lowest since Dec. 12. The yen gained 0.5 percent to 87.73 per dollar, rising against most major peers, after declining to 88.41 on Jan. 4, the weakest level since July 15, 2010. The Japanese currency advanced 0.2 percent to 114.94 to the euro.

New Zealand’s dollar gained versus the majority of its 16 most-traded counterparts. It rose 0.4 percent to 83.53 U.S. cents and strengthened 0.2 percent to NZ$1.5686 per euro.

The euro has strengthened 1 percent in the past month, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. New Zealand’s dollar slipped 0.1 percent, the U.S. dollar dropped 0.5 percent, while the yen tumbled 7.1 percent.

Low Volatility

A gauge of price swings remained below average. JPMorgan Chase & Co.’s G7 Volatility Index, based on three-month options for Group of Seven currencies, was at 7.77 percent after touching 7.54 percent on Jan. 3, the lowest level since Dec. 21. The average in 2012 was 9.23 percent.

Lower volatility makes investments in currencies with higher benchmark interest rates more attractive as the risk in such trades is that market moves will erase profits.

Europe’s economy is forecast to shrink 0.1 percent this year after a 0.4 percent drop in 2012, its first contractions since 2009, according to the median estimate of economists surveyed by Bloomberg. The U.S. may grow 2 percent, compared with 2.2 percent in 2012.

More ‘Discerning’

“The risk-on, risk-off dynamic has morphed into a little bit more of a discerning currency-by-currency analysis,” Thomas Molloy, chief dealer at FX Solutions LLC, an online currency- trading company in Saddle River, New Jersey, said in a telephone interview. “There’s a little bit of an expectation that this year, 2013, will be the year that currencies that have good news will have strong currencies, currencies with bad news will have weaker currencies -- rather than the close-your-eyes and risk- on, risk-off trade that we had in 2012.”

ECB President Mario Draghi’s Governing Council, which cut economic and inflation projections last month, will keep its main refinancing rate at a record low of 0.75 percent on Jan. 10, according to the median estimate of 55 economists in a Bloomberg News survey. Five predicted the central bank will reduce the benchmark to 0.5 percent.

“The ECB meeting will be the focus this week,” said Jane Foley, a senior currency strategist at Rabobank International in London. “If there is more speculation about the ECB cutting interest rates, that could undermine the euro against the dollar.”

Citigroup Inc. forecast the ECB will cut rates as soon as February.

‘Cyclical Headwinds’

“Signals by President Draghi that the Governing Council may be moving closer to lowering rates could add to the cyclical headwinds” for the euro, London-based currency strategists Valentin Marinov and Josh O’Byrne, wrote today in a client note.

The yen rallied after falling against the dollar for eight consecutive weeks amid speculationJapan’s newly elected Prime Minister Shinzo Abe will boost efforts to spur growth.

The government will announce 12 trillion yen ($137 billion) of fiscal stimulus this month to boost the nation’s shrinking economy, the Yomiuri newspaper said today. The extra budget for this fiscal year through March will include 5 trillion yen to 6 trillion yen of public-works spending, the newspaper reported, without saying where it obtained its information.

The yen’s 14-day relative strength index versus the dollar dropped to 15.5 on Jan. 4, below the level of 30 that some traders view as a signal an asset has fallen too fast. The index was 22 today.