Euro climbs from lowest in three weeks amid optimism on Europe

The euro advanced from a three-week low against the dollar amid optimism that Spain’s latest budget and banking measures are moving the euro region closer to containing its debt crisis.

The 17-member currency strengthened versus all of its 16 most-traded peers after Moody’s Investors Service said Spain’s bank recapitalization is positive for the nation’s credit rating. Results of stress tests as part of terms to win a European bailout showed Sept. 28 Spanish banks have a capital deficit less than previously estimated. The pound weakened as an index of U.K. manufacturing fell more than forecast.

“We had some developments last week with the budget and stress tests that, overall, they were OK,” Eric Viloria, senior currency strategist for Gain Capital Group LLC in New York. “It seems like they are making steps toward getting to a more sustainable budget deficit. Obviously it’s going to be a long process.”

The euro appreciated 0.4 percent to $1.2916 at 9:27 a.m. New York time, after dropping as much as 0.4 percent to $1.2804, the weakest since Sept. 11. It strengthened 0.5 percent to 100.69 yen, also erasing a 0.4 percent decline. Japan’s currency was little changed at 77.94 against the greenback.

The euro rose even after reports showed manufacturing in the region contracted for a 14th month in September and the unemployment rate reached the highest on record.

Already Discounted

“Much of the negative news has been discounted, and we’re in a position whereby the market is still very hopeful that we’re moving in Europe toward some more positive news with regards to Spain,” said Ian Stannard, head of European foreign- exchange strategy at Morgan Stanley in London. “The euro is going to be very well supported in this environment.”

A gauge of manufacturing based on a survey of purchasing managers was 46.1, above an initial estimate of 46 on Sept. 20, Markit said today. The index has held for 14 months below 50, indicating contraction, and fell as low as 44 in July. Unemployment was 11.4 percent in August, the same as in June and July after those months’ figures were revised higher, according to the European Union’s statistics office.

Spain’s 10-year bonds rose for a third day, with the yield decreasing six basis points, or 0.06 percentage point, to 5.88 percent.

Spain commissioned the stress tests as part of terms to win external financial aid of as much as 100 billion euros ($129 billion) for its banking system. They showed a deficit of 59.3 billion euros.