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FOREX-Euro rallies after Merkel, Hollande vow support

by on July 27, 2012 3:44 pm BST
 

Fri Jul 27, 2012 11:44am EDT

* Euro gains after Merkel and Hollande comments

* U.S. Q2 GDP data not as weak as feared

(Reuters) – The euro climbed to a
three-week high against the dollar on Friday as German
Chancellor Angela Merkel and French President François Hollande
spoke of their readiness to do anything to safeguard the euro
zone.

“Germany and France are deeply committed to the integrity of
the euro zone. They are determined to do everything to protect
the euro zone,” they said in a joint statement, which echoed
comments a day earlier by European Central Bank chief Mario
Draghi..

In a volatile session, the dollar rose against the yen and
briefly pared losses against the euro on Friday after the
Commerce Department reported that U.S. economic growth slowed,
as expected, in the second quarter. The gross domestic product
number may not be enough to push the Federal Reserve to pump
more money into the economy in the near term, according to some
strategists.

The main focus remained the fiscal debt crisis in the euro
zone and the efforts to stem it.

“They are going to have to back it up at some point, but
investors are not going to stand in the way of the European
Central Bank and governments in the short term,” said Joseph
Trevisani, chief market strategist at Worldwide Markets in
Woodcliff Lake, New Jersey.

The euro was last up 0.7 percent at $1.2364, closer to the
session peak of $1.2377 than the session low of $1.2240.

The euro touched the low after the German central bank said
it remained critical of the ECB’s bond-buying program and
reiterated its opposition to giving a banking license to the
euro zone’s bailout fund.

It reversed that loss after France’s Le Monde newspaper
reported the ECB and governments were preparing to intervene in
financial markets to help bring down Spanish and Italian
borrowing costs..

The euro also was helped by Germany’s Finance Minister
Wolfgang Schaeuble saying on Friday he welcomed the pledge by
the ECB’s Draghi to take all necessary measures to save the
euro.

On Thursday, the euro rose after a pledge by Draghi
to do whatever it took within the bank’s mandate to preserve the
single currency.

Analysts said Draghi’s comments sent a strong signal that
the ECB could take steps to rein in soaring Spanish and Italian
borrowing costs, though a lack of details might limit the euro’s
gains.

The bank, which meets next week to decide on interest rates
and discuss policy measures, has previously bought government
bonds in the secondary market to push yields lower.

Earlier this month, the ECB cut interest rates to support
economic growth. But pressure is building on it to do more as
peripheral euro-zone governments are struggling to implement
tough austerity measures.

Elsewhere, European policymakers are working on “last
chance” options to bring Greece’s debts down and keep it in the
euro zone, with the ECB and national central banks looking at
taking significant losses on the value of their bond holdings,
officials said..

And Spain’s deputy prime minister said on Friday there won’t
be any full-scale bailout of the country. It was not an option
being looked at and was not possible, the official said.
.

SLOW U.S. GDP GROWTH

The dollar maintained gains it posted against the yen after
the U.S. economic growth data despite the euro’s gyrations.

U.S. gross domestic product expanded at an annual rate of
1.5 percent in the April-June period, the weakest pace of growth
since the third quarter of 2011, the Commerce Department said.
.

While many are not expecting the Fed to move immediately, it
may eventually opt for a third round of quantitative easing in
the form of large-scale bond purchases, known as QE3, or cut the
interest rate it pays banks on the excess reserves they leave
with the central bank.

But Friday’s U.S. economic growth data may at least delay
the Fed. Increasing the supply of dollars would be negative for
the currency.

“The GDP data was at the margin fractionally stronger than
expected and plays perfectly to the pre-release thinking that
the Fed can wait for more clarity on the economy from the next
two employment reports before enacting (or not) additional QE
measures at the September FOMC meeting,” said Alan Ruskin, head
of G10 FX strategy at Deutsche Bank in New York.

The dollar gained 0.4 percent against the yen,
trading at 78.53 yen, with a one-week high of 78.64 yen. The
euro was up 1.1 percent against the yen, trading at
97.09 yen, with a session peak of 97.29 yen, its highest since
July 18. It was well above a 12-year low touched earlier this
week.

The euro has gained 1.7 percent against the dollar this
week, its best weekly performance since Feb. 26. The dollar
posted a narrow weekly gain of 0.1 percent against the yen, its
first weekly gain in five weeks.

Stronger risk appetite helped the Australian dollar
to a three-month high on Friday against the U.S. dollar. The
Australian dollar was last up 0.3 percent at US$1.0430.