Euro Rises vs Dollar Amid Speculation European
Central Bank May Intervene
By Tom Giles
Euro Rises vs Dollar on Talk ECB May Support Currency (Update5)
(Updates rates.)
London, May 31 (Bloomberg) -- The euro rose against the
dollar for the first day in four as comments by European Central
Bank officials and U.K. newspaper articles fueled speculation the
ECB may use some of its $248 billion of foreign currency reserves
to buy euros to halt the currency's decline.
Bundesbank president-designate Ernst Welteke said the euro's
10 percent drop since its introduction merits ''observation,''
while other central bank officials said the euro is poised to
rise, sparking talk the ECB might use holidays in the U.K. and
the U.S. to buy the single currency.
''The ECB would not like to be seen as failing to prop up
the currency'' if it falls to $1.0385, said Thomas Bernt
Henriksen, chief economic analyst at Den Dankse Bank in
Copenhagen. Still, officials may ''stick to verbal intervention''
for now, he said.
The euro rose as high as $1.0484 from $1.0403 late Friday.
Earlier on Friday it fell to its lowest level ever, $1.0399. It
was recently at $1.0436.
The dollar was little changed versus the yen, at 121.69 yen
from 121.46 yen, following Friday's rebound from near a four-week
low. The dollar climbed Friday as a gain in U.S. stocks fueled
optimism for further stock increases and dollar demand.
Jawboning
Some traders sold the euro in late European trading as it
became apparent that if an intervention takes place, it wouldn't
be today. It was also hurt after Otmar Issing, the ECB's chief
economist, said the euro's recent decline is ''more than
understandable.''
Much of the euro's recent drop came after the European
Union's decision last week to let Italy have a budget deficit of
as much as 2.4 percent of gross domestic product this year,
higher than its original target of 2.0 percent.
''The more-than-understandable negative reaction from the
public (to that move) and the impact on the euro's external value
should serve as a warning'' to other governments to keep their
budget deficits in line, Issing said in an interview with the
weekly Rheinische Merkur newspaper.
The euro gained in earlier trading after Welteke said the
currency's decline ''merits careful observation,'' suggesting he
doesn't want the currency to fall much further.
U.K. and U.S. markets were closed for holidays. The absence
of traders in London and the U.S., the world's two largest
currency trading venues, meant trades were fewer and smaller than
usual, traders said.
Intervention?
Bundesbank President Hans Tietmeyer said Friday he wouldn't
be happy if the euro falls more, adding that the currency has
scope to rise in the future.
''There are some rumors in the market that the ECB could use
the closes in London and the U.S. to do more than verbal
intervention,'' said Thomas Neeman, chief trader at Bankhaus
Hermann Lampe in Dusseldorf, adding that he doesn't expect it
right away. ''Even if it did it would at most take the euro up''
about a cent, he said.
London newspapers added to the speculation that the ECB may
intervene. The Financial Mail on Sunday, citing economists, said
the ECB has already spent as much as $5 billion to support the
euro. Meantime, the Sunday Telegraph said the ECB is planning
''dramatic intervention'' this week. A spokesman for the ECB said
the central bank doesn't comment on market speculation.
The U.K.'s Guardian and Independent newspapers today also
said the ECB may intervene.
''If the central banks are going to intervene, it would be
less expensive because the U.S. and Britain are not in,'' so
there would be fewer euro sellers to combat a buying spree, said
J.J. Walti, a trader at Zuercher Kantonalbank in Zurich.
The currency's slump threatens to sour investors on euro-
denominated assets and for some, undermines the viability of
economic and monetary union. It could fuel inflation by raising
the prices of imports, though inflation for now remains tame.
Figures today showed that M3 money supply growth, a gauge of
future inflation, slowed in April, from March.
Some traders said the central bank is unlikely to stage an
intervention in the immediate future because such moves tend to
have limited impact unless they're backed by a shift in sentiment
toward a currency.
Welteke, in an interview published in yesterday's
Tagesspiegel, said ''one can't use intervention to turn around
the market trend.''
Many strategists said the euro is poised to fall further as
the European economies underperform the U.S. economy. ''The
conditions in Europe are pretty bad and there's a good chance we
could see the euro at $1.00'' in the coming months, said Neeman
at Bankhaus Hermann Lampe.
Counterproductive
''A premature intervention would go against our first aim,
which is to ensure strong growth in an environment where there is
no threat to price stability,'' said Belgian Finance Minister
Jean-Jacques Viseur.
The currency's weakness can benefit the euro region because
it can lower the price of exports and boost manufacturers'
overseas earnings.
Versus the yen, the dollar got a leg-up from Friday's gain
in U.S. stocks. The dollar had been dragged down earlier last
week as falling U.S. stocks sapped demand among global investors
for the currency to purchase equities.
The outlook for U.S. stocks and bonds dimmed in recent weeks
as signs of rising prices in the U.S. generated concern that
inflation may rise and prompt the Federal Reserve to raise
interest rates. Inflation erodes bonds' fixed value, while rate
increases make it more expensive for companies to take out loans.
In the long run, higher rates could support the dollar by
offering international investors greater return on dollar-
denominated bonds and deposits. U.S. reports this week will shed
more light on future inflation potential.
U.S. Numbers
The National Association of Purchasing Management will
tomorrow publish an index tracking orders, production and other
activity at U.S. factories. The index likely rose to 53.3 in May
from 52.8 in April, according to economists surveyed by Bloomberg
News. Readings above 50 indicate manufacturing is expanding.
A report Friday is expected to show that the U.S. added
216,000 jobs in May, leaving the unemployment rate at 4.3
percent, according to economists surveyed by Bloomberg.
The dollar is also poised to gain versus the yen on fresh
signs Japan's economy is slumping. A report due tomorrow is
expected by economists to show that the unemployment rate rose to
a record high for the third straight month in April, to 4.9
percent. April figures today showed housing starts fell for the
first time in five months, while construction orders dropped 15.1
percent from a year ago.
Figures on money flowing into Japanese stocks showed that in
the week of May 21, non-Japanese investors sold a larger yen
amount of Japanese shares than they bought for the first time
since mid-January, said Ken Landon, a senior currency strategist
at Deutsche Bank in Tokyo. ''The substantial reduction in foreign
inflows into Japanese stocks is a sign that the economy has not
turned the corner,'' he said.
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