Euro rallies most in week as Cyprus-led contagion concern fades

European Bonds

Yields on Italian 10-year bonds fell two basis points, or 0.02 percentage point, to 4.8%, while similar maturity Spanish security yields declined two basis points to 5.1%.

The European Commission said in a statement the control on capital movements must remain “proportionate” and be lifted as soon as possible.

“Euro has come down quite a bit this week,” Robert Lynch, a New York-based currency strategist at HSBC Holdings Plc, said in a telephone interview. “That contagion element has been problematic for the euro in the past and had contributed to the euros’ weakness yesterday, and you don’t have that today. With the more stable backdrop, I think that’s probably contributing to euro’s performance today.”

The Federal Labor Agency said the number of people out of work in Germany increased a seasonally adjusted 13,000 to 2.94 million. Economists had predicted a decline of 2,000, according to the median of 24 estimates in a Bloomberg News survey.

Market Measure

The shared currency may decline to its lowest level in almost three years, according to Morgan Stanley’s Ian Stannard.

“What we’re now seeing, with regards to the continued levels of uncertainty that have been building in the market, is a case where the euro is going to remain under some pressure in the near-term,” Stannard, head of European currency strategy at Morgan Stanley, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Joe Brusuelas. “The euro is going to continue to remain under pressure over the coming year into next year.”

The euro has dropped 0.6% in the past three months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-nation currencies. The dollar has risen 2.9%, while the yen dropped 7%, the worst performer.

BOJ Governor Haruhiko Kuroda told parliament’s upper house today that policy makers need to lower yields on longer-maturity government bonds and that purchases of risk assets may also be needed. The comments echoed lower-house testimony on March 26, when Kuroda pledged to buy more government bonds to reach the BOJ’s inflation goal. The central bank will discuss policy on April 3-4.

“Kuroda’s been talking up more aggressive easing and stamping out deflation,” said Janu Chan, a Sydney-based economist at St. George Bank Ltd. “If the governor does what’s expected, we’ll probably see limited reaction. There’s probably more risk that the yen strengthens than weakens.”

Bloomberg News

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