Euro Rises Most Since September as Greece Wins Aid Package

The euro increased the most in seven months versus the dollar after Greece was offered a rescue package worth as much as 45 billion euros ($61 billion).

The common currency rose versus most of its major counterparts as yields on Greece’s bonds fell on reduced speculation the nation will default. Canada’s dollar traded near parity with its U.S. counterpart as Finance Minister Jim Flaherty said the loonie’s rise reflects the country’s good fiscal position.

“We saw a relief rally in the euro when the aid package to Greece was formalized,” said John McCarthy, director of currency trading at ING Groep NV in New York. “The deal took the pressure off the euro that had been building because of the Greek crisis.”

The euro increased as much as 1.4 percent to $1.3692, the highest level since March 18, before trading at $1.3587 at 4:06 p.m. in New York, compared with $1.35 on April 9. The advance matched an intraday rally on Sept. 8. The euro appreciated 0.7 percent to 126.68 yen, from 125.79. The dollar traded at 93.23 yen, compared with 93.18.

After Greek borrowing costs surged to an 11-year high, euro-region finance ministers said yesterday they would offer as much as 30 billion euros in three-year loans in 2010 at about 5 percent interest. Another 15 billion euros would come from the International Monetary Fund. The three-year Greek bond yield fell 0.69 percentage point to 6.29 percent today.

‘Default Scenario’

“The package provides a funding structure and should temper the default scenario through the end of 2010,” said Tom Fitzpatrick, chief technical analyst at Citigroup Inc. in New York. “In the near-term perspective, the market has the bit between its teeth and to go against this move is not the right way to go.”

The euro will rally to at least $1.38 by the end of the week and will trade at $1.43 within three months as traders rush to cover bets that the euro will fall, according to Credit Suisse Group AG.

“We believe that the plan could drive a short-covering rally in the euro by reducing perceptions of credit risk in the euro area sharply,” Credit Suisse strategists including Ray Farris in London and Daniel Katzive in New York wrote in a note to clients today. A short is a bet a currency will fall.

Futures traders lowered wagers that the euro will fall against the U.S. dollar, figures from the Washington-based Commodity Futures Trading Commission showed last week.

Bets Against Euro

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 67,223 on April 6, compared with net shorts of 85,326 a week earlier.

The committee responsible for determining when U.S. recessions begin and end said it’s too early to declare an end to the current slump.

“Although most indicators have turned up, the committee decided that the determination of the trough date on the basis of current data would be premature,” the Business Cycle Dating Committee of the National Bureau of Economic Research said in a statement on its Web site.

The Canadian currency was little changed at C$1.0031 per U.S. dollar, erasing losses as a Bank of Canada survey showed the nation’s businesses expect sales growth over the next year.

The so-called loonie has gained 4.9 percent against the U.S. dollar this year and touched parity last week with its U.S. counterpart for the first time in almost two years.

‘Relatively Orderly’

The Canadian dollar’s appreciation “has been relatively orderly; it has not been particularly erratic,” Flaherty told reporters in Winnipeg, Manitoba. “It gives some comfort I think to business in Canada that they can deal with it.”

The Canadian central bank’s quarterly Business Outlook Survey showed 64 percent of executives said sales growth will quicken over the next year, while another 20 percent expect sales to slow, the Ottawa-based central bank said today.

Trading in currency options shows that emerging economies have become safer relative to developed nations than at any time in almost two years.

“The global perception of risk is changing,” said Jerome Booth, who helps manage $32 billion in emerging-market assets as the head of research at Ashmore Investment Management Ltd. in London. “Where you want to be is non-leveraged places, and that means anything in emerging markets. This is a start of a trend. The rally in emerging-markets has barely started yet.”

Brazil’s real will surge as much as 10 percent by July as its central bank raises interest rates to stem inflation, spurring purchases by global investors searching for higher yields, forecasts compiled by Bloomberg show. It advanced to 1.7548 versus the dollar today.

Emerging Currencies Overtake G-7 as Volatility Drops

raders in currency options are showing that emerging economies have become safer relative to developed nations than at any time in almost two years.

Three-month implied volatility for the seven biggest developing country currencies fell to 10 percent in March compared with 11.4 percent for industrialized nations, according to JPMorgan Chase & Co. indexes. The gap is the widest since July 2008. So far this year, eight of the 10 best-performing currencies are from emerging markets.

The record U.S. budget deficit, Europe’s bailout of Greece and the prospect of a hung parliament in the U.K. are increasing the risk of losses in dollars, euros and pounds. In developing markets, the deficit fell to one-third the level of advanced nations this year and the economies are growing twice as fast as the U.S., the International Monetary Fund says.

“The global perception of risk is changing,” said Jerome Booth, who helps manage $32 billion in emerging-market assets as the head of research at Ashmore Investment Management Ltd. in London. “Where you want to be is non-leveraged places, and that means anything in emerging-markets. This is a start of a trend. The rally in emerging-markets has barely started yet.”

Global Recovery

That’s a switch from three years ago, when record-low volatility was fueled by investors underestimating the risks of leverage. Now, volatility is declining in developing markets as countries from China to Brazil lead the global recovery, while swelling budget deficits in the U.K. and U.S. will weaken those nations’ currencies, Booth said.

Emerging-market currencies were mixed as of 12:01 p.m. in New York. Russia’s ruble rose 0.4 percent against the dollar to its strongest level in more than four months, while Hungary’s forint appreciated 0.7 percent versus the euro. The Thai baht weakened 0.3 percent against the dollar after a clash between soldiers and protesters left as many as 21 people dead.

The MSCI Emerging Markets Index of shares slipped 0.1 percent. The extra yield investors demand to own emerging-market debt over U.S. Treasuries was little changed at 2.42 percentage points, according to JPMorgan Chase & Co.’s EMBI+ Index.

China’s imports surged 66 percent in March from a year earlier, causing the country’s first trade deficit since 2004. The increase in imports helps the global economic recovery, Huang Guohua, the head of the customs bureau’s statistics department, said on April 9.

Lira Rally

The Turkish lira has climbed 6.8 percent against the euro this year through April 9, reaching the strongest intraday level since December 2008. Gross domestic product increased at an annual rate of 6 percent in the fourth quarter of 2009, lagging behind only China among the Group of 20 nations. Goldman Sachs Group Inc. forecasts the expansion may help Turkey’s $620- billion economy overtake Germany to become the third-biggest in Europe by 2050.

The implied volatility for the lira is below that of the pound by the most since 2000. The lira was forecast to fluctuate at an annual rate of 10.6 percent in the next three months, as of March 30, 2.7 percentage points less than the pound, data compiled by Bloomberg show.

“Dropping volatility says: ‘Buy, buy, buy,” said Sebastien Galy, a currency strategist at BNP Paribas SA in New York.

U.K. Budget

In the U.K., the pound is down 5 percent versus the dollar this year and has fallen against 14 of 16 most-traded currencies, including an 11.7 percent drop against the Mexican peso. National elections are raising the prospect that U.K. voters may fail to elect a governing majority for the first time since 1974. A weakened government may struggle to enact budget cuts with the nation’s debt set to almost double.

The euro has lost 12 percent versus the Mexican peso this year as Europe weighed options to help Greece avoid default on its debt. European governments offered Greece a rescue package worth as much as 45 billion euros ($61 billion) yesterday at below-market interest rates.

“Investors had a bit of a blasé attitude prior to the Greek situation,” said Robert Stewart, who oversees $74 billion as the head of currencies at JPMorgan Asset Management in London. “Investors are slowly awakening to the reality.”

Three decades ago, emerging-market currencies fluctuated the most amid debt crises and hyper-inflation. Mexico defaulted in 1982 while the Asian financial crisis that started in 1997 wiped out one third of the region’s economy.

U.S. Debt

Now it’s developed countries that are dealing with the biggest debt. The administration of President Barack Obama predicts its budget deficit will swell to a record $1.6 trillion in the fiscal year ending Sept. 30. Moody’s Investors Service forecasts that the U.S. will spend more on debt service as a percentage of revenue this year than any other top-rated country except the U.K.

Emerging nations are moving in the opposite direction. The budget deficit for developing countries will fall to 2.8 percent of their economies this year, from 4 percent in 2009, according to an IMF report in November. Industrialized governments’ budget gap will decline to 8.1 percent from 8.9 percent, the Washington-based fund said.

Developing nations reduced their foreign debt to 26 percent of GDP last year from 41 percent in 1999, while advanced nations’ debt may surge to 106.7 percent of GDP this year from 78.2 percent in 2007, according to IMF data.

Credit Crisis

In July 2007, the JPMorgan Emerging Market Volatility Index fell to a record low of 5.8 percent as central banks made their interest-rate and currency moves more predictable. When credit markets froze later that year, the index began rising and hit a record 35.8 percent in October 2008, one month after Lehman Brothers Holdings Inc. collapsed. The JPMorgan G-7 Volatility Index, including the euro, the pound and the yen, reached 26.6 percent.

Emerging-market volatility is falling again as the Mexican peso and the Malaysian ringgit gained 7.6 percent and 6.7 percent versus the dollar this year, the best performers in the world after the Costa Rican colon.

Mexico’s government forecasts it will keep the budget deficit at 2.8 percent of GDP this year after lowering spending and increasing taxes even as the economy shrank 6.5 percent in 2009 in its worst recession since 1932.

Mexican Peso

The implied volatility of the Mexican peso was 1.39 percentage points below that of the euro as of April 1, the most since October 2008, according to Bloomberg data.

Exports from Malaysia, South Korea and Taiwan are growing to feed demand in China, which is leading the global economic recovery. Overseas shipments from Malaysia rose 18.4 percent in February from a year earlier. The central bank has raised its growth forecast for Southeast Asia’s third-largest economy, predicting an expansion of as much as 5.5 percent this year, the fastest since 2007. Korea exports climbed 35.1 percent in March from a year earlier, while Taiwan’s surged 50.1 percent.

Investors may be overlooking the risks of developing- nations, said Harald Hild, a money manager at Quaesta Capital Optivest AG in Switzerland, which oversees about $1 billion. The South African rand, Colombian peso and Brazilian real have increased more than 20 percent in the past year against the dollar, making their exports more expensive. These countries are also “highly dependent” on the U.S. and may falter should America’s economic recovery stumble, he said.

“It’s really amazing how strong the risk appetite is for emerging-market currencies,” said Hild, who has traded currency options for 16 years. “I’m not sure how long this will hold.”

‘Strategic Trend’

Countries from Chile to China may lure $722 billion in overseas investment this year, 66 percent more than in 2009, the Washington-based Institute of International Finance said in January. Developing-nation bond funds attracted $7 billion this year, pushing assets under management to a record $74.7 billion, according to Cambridge, Massachusetts-based research company EPFR Global.

Falling volatility is making emerging-market currencies more attractive, especially to investors in carry trades, said Thanos Papasavvas, head of currency management at Investec Asset Management in London. In such trades, investors borrow in countries with low interest rates to buy financial assets in those with higher yields.

“You’ll see the appreciation of emerging-market currencies versus developed-market currencies as a long-term, strategic trend,” said JPMorgan’s Stewart. “Investors will allocate more to emerging markets.”

Brazil’s Real to Gain as Rate Rise Spurs Carry Trade

Brazil’s real will surge as much as 10 percent by July as the central bank raises interest rates to stem inflation, spurring purchases by global investors searching for higher yields, forecasts compiled by Bloomberg show.

The so-called carry trade, in which investors borrow in nations with low interest rates to buy higher-yielding assets, will help push the real to 1.6 per dollar by July from 1.7640 on April 9, according to UBS AG’s forecast, the highest among 16 compiled by Bloomberg. The median estimate shows the currency will rise to 1.75 per dollar by July, a 0.8 percent advance.

Interest rate futures contracts indicate traders expect the central bank to lift the benchmark rate by at least half a percentage point to 9.25 percent at its April 28 policy meeting and to 12.50 percent by May 2011. While Brazil’s 8.75 percent rate is a record low, it’s higher than near zero rates in the U.S., 1 percent in the euro-zone and 0.1 percent in Japan.

“The size of interest rate hikes in Brazil is so much bigger” than in developed economies, said Luis Fernando Lopes, a partner at Patria Investimentos, who helps manage 1.1 billion reais ($620 million) in assets in Sao Paulo. “It’s a whole other level. Only an external catastrophe could derail the appreciating trend in the real.”

The real gained 0.3 percent to 1.7580 per dollar at 2:34 p.m. New York time today, paring its drop this year to 0.8 percent. It climbed 33 percent in 2009, the best performance among 26 emerging-market currencies tracked by Bloomberg.

‘Ultimate Carry Trade’

“Brazil to me is the ultimate carry trade,” said Kevin Sollitt, head of foreign exchange at Paradigm Wealth Management in Cleveland, who helps manage $100 million in assets. “How can you short a currency with an interest rate close to 10 percent when the economy is on track to growth and the stock market is booming?,” said Sollitt, who forecasts the real will gain 7.6 percent to 1.64 per dollar by the end of this quarter.

The Bovespa stock index has climbed 3.5 percent this year, extending last year’s 83 percent gain, boosted by higher commodity prices and expectations gross domestic product will grow more than 5 percent this year, according to the median estimate in a Bloomberg survey of economists. The measure dropped 0.6 percent to 70,974.19 today.

Gains in the real may be limited if the government steps up dollar purchases to protect exporters, some investors say.

“The market knows the government becomes worried when the exchange rate approaches 1.75,” said Luciano Rostagno, chief Brazil strategist at CM Capital Markets, a Madrid-based brokerage.

Debt Sales

Brazil’s Treasury Secretary Arno Augustin said in January the nation may sell local debt to raise cash that can be used to buy dollars in the foreign-exchange market. In December, President Luiz Inacio Lula da Silva authorized the sovereign wealth fund to purchase dollars to create another government- related buyer of U.S. currency in addition to the central bank.

The central bank has bought dollars every day in the spot market since May 8, widening the country’s international reserves to a near-record $245 billion as of April 8.

Brazil plans to sell bonds in international markets in coming weeks, Augustin told reporters in Brasilia last week, adding that ratings agencies may raise the country’s debt grade.

The government may be less inclined to prevent gains in the real because of rising inflation, according to Patria’s Lopes.

‘Inflation Fight’

“A stronger real helps in the fight against inflation, which is not going well,” he said. “No one in the government will be pulling their hair out if the exchange rate goes beyond 1.7 per dollar.”

Annual inflation has accelerated for four months and has been above the central bank’s target of 4.5 percent in all three months of 2010. Consumer prices rose 5.17 percent in March from the same month a year earlier, the government’s statistics agency said last week.

The yield on the interest rate futures contract due in January 2011, the most traded on the Sao Paulo futures exchange, fell one basis point, or 0.01 percentage point, to 10.51 percent today, retreating from the highest level in three weeks.

Canada Dollar Trades Near Parity as Survey Reinforces Outlook

Canada’s dollar traded near parity with its U.S. counterpart after a Bank of Canada survey showed the nation’s businesses expect sales growth over the next year, adding to the evidence of an economic recovery.

The Canadian currency, nicknamed the loonie for the image of the aquatic bird on the C$1 coin, pared earlier losses after the survey showed businesses plan the fastest price increases in more than a decade. Finance Minister Jim Flaherty said the loonie’s rise has been “orderly” and reflects the country’s good fiscal position.

“It’s a hugely important and useful survey, and it’s one that confirms that the recovery is intact,” said Eric Lascelles, chief economics and rates strategist at Toronto Dominion Bank’s TD Securities unit in Toronto. He forecasts the loonie will appreciate through parity to 98 cents by the end of the quarter.

The Canadian currency traded at C$1.0026 per U.S. dollar at 4:25 p.m. in Toronto, compared with C$1.0027 on April 9. It earlier weakened as much as 0.6 percent. One Canadian dollar buys 99.74 U.S. cents.

Government bonds were little changed.

Canada’s dollar, which has gained 5.1 percent against the U.S. dollar this year, achieved parity last week with its U.S. counterpart for the first time in almost two years.

‘Relatively Orderly’

The appreciation “has been relatively orderly; it has not been particularly erratic,” Flaherty, 60, told reporters in Winnipeg, Manitoba. “It gives some comfort I think to business in Canada that they can deal with it.”

The central bank’s quarterly Business Outlook Survey showed 64 percent of executives said sales growth will quicken over the next year, while another 20 percent expect sales to slow, the Ottawa-based central bank said today.

Forty-five percent of companies said they will charge more for their products, and 17 percent predicted slower price gains. The so-called balance of opinion was 28 percent, the highest level since the question was first asked in 1998.

“Responses to the spring survey provide further evidence that the recovery is taking hold,” the bank said.

Canada’s dollar earlier depreciated along with other commodity-linked currencies after the announcement of a rescue package for Greece’s economy boosted the euro.

Euro-region finance ministers said yesterday they would offer as much as 30 billion euros ($41 billion) in three-year loans in 2010 at around 5 percent. As much as 15 billion euros more would come from the International Monetary Fund. The euro touched a three-week high of $1.3692 against the greenback.

Interest Rates

The Canadian currency gained last week amid speculation the central bank will increase interest rates faster than the Federal Reserve.

The Bank of Canada will raise its overnight rate to 1.25 percent from a record low 0.25 percent by year-end, according to a Bloomberg survey. The Fed will increase its benchmark to 0.75 percent by then, from a current range of zero to 0.25 percent, another Bloomberg survey showed. The Canadian central bank next meets on April 20, and U.S. policy makers meet on April 28.

“The data that was released this morning by the Bank of Canada suggests that the growing probability of a rate hike in June,” said Stefane Marion, chief economist and strategist at National Bank Financial Inc. in Montreal. “The data right now is so strong that it would justify the Bank of Canada to move somewhat sooner, so that could help the Canadian dollar.”

Marion predicts the loonie will appreciate two cents past parity, and end the year back at 95 U.S. cents.

Bank of Canada Governor Mark Carney signaled last month he’s open to raising the key rate as soon as June 1 as inflation and growth outpace forecasts.

The 10-year Canadian note yield rose one basis point today, or 0.01 percentage point, to 3.66 percent. The price of the 3.75 percent security due in June 2019 declined 8 cents to C$100.71.

Canada’s government bonds have made investors 0.7 percent this year, according to a Merrill Lynch & Co. index.