Euro Rises on German Backing for Draghi Euro-Bloc Rescue Plan

Three day rise for euro.

Aug. 7 (Bloomberg) -- The euro rose for a third day against dollar and was stronger versus the yen after Germany backed European Central Bank President Mario Draghi’s proposals to stem the region’s debt crisis.

The shared currency gained versus most of its 16 major counterparts as a report showed Italy’s economy shrank less than economists predicted. Euro gains were supported as the European Union said it had received no requests for the region’s rescue fund to buy government bonds. Norway’s krone climbed after manufacturing increased.

“There’s a slightly risk-on tone to the market,” Greg Anderson, the North American head of G-10 currency strategy at Citigroup Inc. in New York, said in a phone interview. “It’s leading into the closing of shorts, because that’s where the market was positioned last week. The market will continue to pay most attention to European policy and headlines.” A short position is a bet an asset will decline.

The euro appreciated 0.2 percent to $1.2423 at 11:46 a.m. New York time. The 17-nation currency rose 0.8 percent to 97.77 yen after climbing to 97.80 yen, the strongest level since July 12. The yen fell 0.6 percent to 78.69 per dollar.

The shared currency gained 0.3 percent in the past week versus nine developed-nation counterparts tracked by the Bloomberg Correlation-Weighted Indexes. The yen led decliners, dropping 1.5 percent, while the greenback fell 0.9 percent.

The Mexican peso strengthened as a gain in crude prices boosted the outlook for revenue from the Latin American country’s exports. The currency appreciated 0.1 percent to 13.1826 per dollar, extending its rally this year to 5.7 percent, the biggest among its most-traded counterparts.

Draghi’s Plan

Draghi outlined a plan last week under which the ECB may buy debt of struggling euro-bloc countries in tandem with the region’s bailout fund, while saying the details still need to be worked out over the coming weeks.

Germany is “not worried” by Draghi’s Aug. 2 statement on possible bond purchases, Chancellor Angela Merkel’s deputy spokesman Georg Streiter said in Berlin yesterday.

“The fact that the German spokesperson made an official statement for the first time about the country’s backing of ECB bond purchases is supporting the euro,” said Ken Takahashi, assistant vice president of global markets at Sumitomo Mitsui Trust Bank Ltd. in New York. “The market is reassessing the ECB’s decision and taking a more positive view on it.”

Krone, Pound

Norway’s manufacturing production gained 0.8 percent in June from May, when it rose a revised 0.6 percent, the Oslo- based statistics agency said in a statement today. The median prediction of three economists in a Bloomberg News survey was for a 0.4 percent gain.

The Norwegian krone climbed for a third day against the dollar, rising 0.9 percent to 5.9090. The currency was 0.7 percent stronger against the euro at 7.3385.

Britain’s pound strengthened after a government report showed industrial output fell less in June than economists predicted, suggesting the recession was less pronounced in the second quarter than previously reported. Sterling rose 0.3 percent to $1.5653 and increased 0.2 percent to 79.35 pence per euro.

The Swiss franc rose against the dollar and was little changed against the euro after Switzerland’s central bank said foreign-currency reserves surged to a record in July amid the defense of the currency’s ceiling.

The franc rose 0.2 percent to 96.70 centimes per dollar and was at 1.20151 per euro, from 1.20150 yesterday.

Switzerland’s cash pile swelled 11.3 percent in the month to 406.5 billion Swiss francs, the Swiss National Bank said on its website today. That pushed holdings to a record 71 percent of GDP, according to the government’s forecast for 2012.

 Italy, Germany

Italian gross domestic product declined 0.7 percent in the second quarter, Istat, the Rome-based national statistics institute, said in a preliminary report today. The median estimate in a Bloomberg News survey of economists was for a 0.8 percent decline. GDP fell 2.5 percent from a year earlier.

 The euro held gains even after Germany’s Economy Ministry in Berlin said factory orders dropped 1.7 percent from May, when they rose 0.7 percent. Economists projected a 0.8 percent decline.

“In the very short term, the euro is headed higher,” Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York, said in a radio interview on “Bloomberg Surveillance” with Ken Prewitt and Tom Keene. “I’m thinking we get a little pop up in the euro now and sell off next month.”

 ‘Appropriate’ Settings

Australia’s dollar rose to the strongest since March against the U.S. currency after the Reserve Bank said current policy settings were “appropriate.” RBA Governor Glenn Stevens and his board said in a statement the nation’s growth was close to trend.

The so-called Aussie was little changed at $1.0571 after reaching $1.0604, the strongest level since March 20.

A corrective pullback in the currency is likely at these levels, as the area from $1.0639 to $1.0695 includes its mid- March peak versus the greenback, Niall O’Connor, a New York- based technical analyst at JPMorgan, wrote in a note to clients today.

If the Aussie depreciates to the $1.0400 to $1.4035 area, then down to $1.0345, its short-term “bullish spin” would diminish, according to O’Connor.

South Africa’s rand strengthened to its highest level in more than a month. The currency gained as much as 0.6 percent to 8.1189 per dollar, the strongest since July 5, before paring back to 8.1341.

 Benchmark Rates

Implied volatility on three-month options for Group-of- Seven currencies fell as low as 8.53, the lowest level since July 20, according to the JPMorgan G7 Volatility Index. It reached 8.32 percent on July 20 and rose to 9.83 percent on July 24. The five-year average is 12.4 percent.

Lower volatility makes investments in currencies of nations with higher benchmark interest rates more attractive because the risk in such trades is that market moves will erase profits. Key rates are 5 percent in South Africa and 3.5 percent in Australia, versus zero to 0.25 percent in the U.S., 0.75 percent in the euro bloc and zero to 0.1 percent in Japan.

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