The euro advanced for a second day against the dollar after Spain’s pledge to meet its deficit target improved prospects for an international rescue that may help stem the region’s financial turmoil.
Europe’s shared currency also appreciated for a second day versus the yen as the French government prepared to deliver its budget and before Spain announces the results of bank sector stress tests. The dollar weakened against most of its major counterparts before a report forecast to show consumer spending stagnated in August. China’s yuan rose to the strongest level versus the dollar since the nation unified official and market exchange rates at the end of 1993.
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Mariano Rajoy, Spain's prime minister. Photographer: Angel Navarrete/Bloomberg
“Optimism is on the up again, because Spain’s budget shows a willingness to compromise, and this is helping the euro,” said Carolin Hecht, a currency strategist at Commerzbank AG in Frankfurt. “In terms of sustainability of this move we see many risks, because the past has shown that Spain is likely to miss its targets.”
The euro advanced 0.3 percent to $1.2954 at 10:33 a.m. London time, trimming its weekly decline to 0.2 percent. It rose 0.4 percent to 100.59 yen, on track for a 0.9 percent drop over the week. The yen was little changed at 77.65 per dollar after earlier touching 77.44, the strongest since Sept. 13.
Spanish Plan
Spanish Prime Minister Mariano Rajoy’s Cabinet yesterday approved a new tax on lottery winnings and a cut in ministries’ spending to shrink the euro area’s third-biggest budget deficit. The plan “responds to country-specific recommendations and goes even beyond them in some areas,” European Union Economic and Monetary Affairs Commissioner Olli Rehn said in an e-mailed statement yesterday.
Europe’s 17-nation currency will end the year at $1.23, Hecht predicted, because risks, including the prospect of Spain’s credit rating being reduced to non-investment grade, or junk status, will cause it to weaken.
Moody’s Investors Service said Aug. 30 that it would probably extend its review of Spain’s credit rating, which started June 13, through the end of this month in order to get more information on support measures for the nation. Moody’s currently ranks the nation at Baa3, one step above junk.
Spain will reveal results of a test conducted by Oliver Wyman on 14 banking groups after the market closes in Madrid.
Stress Test
“The result of the bank stress test should be a sideshow,” analysts including Hans Redeker, head of currency strategy at Morgan Stanley in London, wrote in a note to investors. “We remain risk-positive and expect risky currencies to rally.”
In France, President Francois Hollande will unveil the first Socialist government budget in a decade, with an aim to reduce the deficit to 3 percent of GDP from 4.5 percent in 2012. Hollande seeks to raise taxes by 20 billion euros.
The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six U.S. trading partners, fell 0.2 percent to 79.402, extending this month’s drop to 2.2 percent.
U.S. household purchases rose 0.5 percent after increasing 0.4 percent in July, according to the median estimate of 77 economists surveyed by Bloomberg.
China’s yuan climbed on speculation the nation will step up efforts to arrest a slowdown in the world’s second-largest economy. The monetary authority injected a record amount of funds into the financial system this week to ease a cash squeeze in the run up to a week-long holiday that starts Oct. 1.
“Funds are flowing back into the market as people bet China will soon act more aggressively to revive growth,” said Kenix Lai, a Hong Kong-based foreign-exchange analyst at Bank of East Asia Ltd. (23)
The yuan rose as much as 0.3 percent to 6.2835 per dollar. The currency, which has strengthened 1.1 percent this quarter, can trade as much as 1 percent on either side of the central bank’s daily fixing.