Euro rises as debt worries ease

London: The euro rose the most last week against the greenback in more than year as an easing in concern over Europe's debt crisis spurred traders to end bets the shared currency would decline.

The euro appreciated for a second week versus the yen, the first back-to-back weekly gains since March, as increased demand at a Spanish bond sale and an agreement by European Union leaders to disclose how banks perform on stress tests damped investor worries about the region's financial system. The dollar fell versus the yen as Japan's ruling party announced a deficit-cutting plan and disappointing US data increased speculation the Federal Reserve would keep interest rates at a record low.

"The recent news out of Europe is reassuring," said Camilla Sutton, a Bank of Nova Scotia currency strategist in Toronto. "Europe will release the results of stress tests and give the market the clarity it looked for. The US will be on hold for longer. That helped equities and boosted risk appetite."

Hedge funds

The euro rose 2.3 per cent to $1.2388 last week, the biggest gain since the five days ended May 22, 2009, from $1.2112 on June 11. It touched $1.2417 Friday, the highest level since May 28. Europe's common currency rose 1.3 per cent to 112.40 yen, from 111 on June 11. The dollar fell 1 per cent to 90.71 yen, from 91.65 a week ago.

The common currency gained as futures traders decreased their bets that the currency will decline against the US dollar to the lowest level since April, figures from the Washington-based Commodity Futures Trading Commission show.

The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain — so-called net shorts — was 62,360 on June 15, after dropping 44 per cent from 111,945 a week earlier.

"About 70 per cent of the euro's gain was short covering," said Brian Dolan, chief strategist at FOREX.com, a unit of online currency trading firm Gain Capital in Bedminster, New Jersey. "The downside had become extreme, and sentiment was extreme. It's slow going on the way up. I think we'll see losses developing faster than recoveries."

Spain sold 3 billion euros (Dh13.7 billion) of 10-year debt on June 17 at an average yield of 4.864 per cent, less than the 5.04 per cent that the bonds traded at before the sale. Demand was 1.89 times the amount on offer. It also sold 479.2 million euros of 30-year debt at 5.908 per cent, and the bid-to-cover ratio was 2.45, higher than the 1.38 at the previous sale on March 18.

Deficit reduction

"We had the credit markets more or less stabilise," said Boris Schlossberg, director of research at online currency trader GFT Forex in New York. "That's why the euro continues to perform well."

The pound gained last week the most versus the greenback since the week of April 2 before of the UK's announcement of budget cuts on June 22, which may help it avoid the rising bond yields afflicting Spain and Portugal.

Chancellor of the Exchequer George Osborne is set to outline the deepest spending cuts since at least the 1970s to tame a budget deficit of 11 per cent of gross domestic product last fiscal year. UK government bond yields have fallen 0.339 percentage point since Prime Minister David Cameron took office six weeks ago on expectations his coalition government will step up the pace of deficit reduction.

The pound climbed 1.9 per cent to $1.4824 last week from $1.4552 on June 11. It fell 0.4 per cent to 83.59 pence per euro.

The yen posted a second weekly gain versus the dollar after Japanese Prime Minister Naoto Kan pledged to cut the world's largest public debt. Kan said he'd consider an opposition party proposal to raise the consumption tax.

The greenback fell against all 16 major currencies last week after the number of American's filing for jobless benefits for the first time rose, increasing speculation that economic growth in the US remains fragile.