Euro headed for weekly advance on optimism for ECB crisis plan

‘Negative Consequences’

Merkel, who is due to meet French President Francois Hollande on Aug. 23 and Greek Prime Minister Antonis Samaras a day later, is considering easing Greece’s bailout terms, two German lawmakers said.

“Obviously time is pressing” on stamping out the debt crisis, though “on many of these issues we feel we’re on the right track,” she told reporters in Ottawa yesterday at a press conference with Canadian Prime Minister Stephen Harper.

The euro gained 0.6 percent over the past week, the best performer alongside the Swiss franc among the 10 developed- market currencies tracked by Bloomberg Correlation-Weighted Indexes. The yen declined 1.5 percent and the dollar gained 0.3 percent.

Yield Spread

The difference in yields between U.S. and German 10-year bonds today reached its widest point since June 6, at 32 basis points, or 0.32 percentage point. The spread could put downward pressure on the euro by making German debt less attractive, Charles St-Arnaud, a foreign-exchange strategist at Nomura Holdings Inc. in New York, said in a telephone interview.

The benchmark 10-year Treasury note yielded 1.81 percent versus 1.49 percent for equivalent maturity German debt.

“Yields in the U.S. are increasing compared to Germany, which could put some pressure on the euro,” St-Arnaud said.

Nomura forecasts that the euro will fall to $1.18 versus the greenback by the end of the third quarter and $1.15 by year end.

The euro zone’s current account climbed to a seasonally adjusted 12.7 billion euros ($15.7 billion) in June from 10.3 billion euros the previous month, according to data from the European Central Bank in Frankfurt.

Aussie Drop

Australia’s dollar fell 0.8 percent to $1.0424, the biggest one-day drop since July 23, based on closing prices. For the week, it’s down 1.5 percent, the biggest drop since May 18.

Models used by the International Monetary Fund and other analysts show, “the Australian dollar is overvalued compared to its medium- to long-run equilibrium value,” according to the Treasury report on its website today. The Reserve Bank of Australia will next week release minutes of its Aug. 7 meeting, where policy makers left the key interest rate at 3.5 percent.

The Aussie fell against 15 of its 16 major counterparts today as China’s economy showed signs of slowing. Gross domestic product is forecast to increase 8.2 percent this year, a percentage point less than in 2011, according to the median estimate of economists surveyed by Bloomberg.

“There is a sense that the Australian dollar is vulnerable,” Juckes said. “If the Australian economy slowed, it would be vulnerable. If they talk about easing rates further, it would be vulnerable. If the Chinese trade story deteriorates, it’ll be vulnerable.”

The euro may strengthen against the Australian dollar to the highest level in more than a month if it breaks through resistance at A$1.1860 to A$1.1935, according to JPMorgan Chase & Co., citing technical indicators. If it breaches this resistance, it may rise to A$1.20 to A$1.21, a level last passed on July 13. It was up 0.5 percent at A$1.1814 today.

Bloomberg News

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