Euro Up on Rate Hike Speculation

Currency gains after EU officials agree to reconsider terms of Greek bailout

The euro rose against the dollar, rebounding from its biggest two-day drop since 2008, on speculation the region’s debt crisis won’t keep the European Central Bank from increasing interest rates.

The common currency gained after European Union officials agreed in an unannounced meeting on May 6 to reconsider the terms of the 110 billion-euro ($158 billion) lifeline Greece received last year. The yen weakened versus most major peers and the dollar index slipped as commodities rallied. The pound depreciated after the Confederation of British Industry lowered its economic growth predictions and a report showed house prices unexpectedly fell.

“That we still have a Fed policy that implies low interest rates for quite a prolonged period of time means that the rate differential still works in favor of the euro,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG in Frankfurt. “As long as people believe that the ECB can continue its interest-rate policy despite the euro-zone debt crisis, this will be an ongoing trend with spikes to the downside again and again as we see bad news like that on Friday.”

The euro strengthened 0.5 percent to $1.4391 as of 7:31 a.m. in New York. It touched $1.4311 on May 6, the lowest since April 19. The 17-member shared currency rose 0.7 percent to 116.19 yen, after falling to 114.99 in early trading, the weakest since March 29.

The yen was 0.2 percent weaker at 80.76 per dollar. It reached 79.57 versus the greenback on May 5, the strongest since March 18, when Group of Seven central banks intervened to stem the yen’s gain after a record earthquake struck Japan.

Expanding Lifeline
The euro has risen 2.9 percent this year in a measure of the currencies of 10 developed nations, according to Bloomberg Correlation-Weighted Currency Indexes. The yen has weakened 4.6 percent, while the dollar is down 5.1 percent.

Expanding the Greek rescue program may mean that assets or revenue from asset sales are used to secure extra funds, a person with direct knowledge of the situation said. Demanding collateral, an idea floated last year by Finland, may help avoid a political backlash against bailouts. Greek government debt declined, pushing the two-year yield eight basis points higher to 25.42 percent.

‘Dust Settles’
March exports in Germany, Europe’s largest economy, jumped 7.3 percent from a month earlier, bolstering the case for tighter monetary policy in the euro region. Economists had forecast a 1.1 percent increase, according to the median of 10 estimates in a Bloomberg News survey.

Swaps traders are betting the ECB will raise its target rate by 74 basis points over the next 12 months, a Credit Suisse Group AG index showed. Another index forecasts 30 basis points of tightening by the Federal Reserve for the same period.

“The euro’s going to continue to weaken against some of its European peer group in Scandinavia,” said Kit Juckes, head of foreign-exchange strategy at Societe Generale SA. “But the big trend, the dollar’s downtrend, reinforced by the Fed’s willingness to keep rates on hold for much longer than the ECB, does suggest when the dust settles we will make it back up and through $1.50.”

Juckes spoke in an interview on Bloomberg Television’s “Countdown” with Mark Barton.

Bloomberg News

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