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Euro Rises Versus Yen on Prospect of Euro Firewall Boost

The euro touched a 4 1/2-month high against the yen as German Chancellor Angela Merkel said European officials have discussed combining euro-area bailout funds to reinforce the region’s financial firewall.

Demand for the 17-nation euro was also supported before Italian Prime Minister Mario Monti holds talks with unions and employers to revise labor laws this week. The yen traded near an 11-month low versus the dollar as Asian stocks extended a four- day rally from last week, damping demand for haven assets. Federal Reserve Bank of New York President William C. Dudley speaks today at Melville, New York.

“There’s no doubt the market would very much like to see the two bailout funds combined,” said Sean Callow, a senior currency strategist in Sydney at Westpac Banking Corp. (WBC) “Anything that increases the firepower will be well received. It’s certainly one of the positives for the euro.”

The euro touched 110.15 yen, the highest since Oct. 31, before trading at 109.78 at 11:47 a.m. in Tokyo, 0.2 percent lower than 109.95 on March 16 in New York. The common currency bought $1.3165 from $1.3175 on March 16, when it rose 0.7 percent. The yen was little changed at 83.40 per dollar from 83.43. Japan’s currency on March 15 touched 84.18, the weakest since April 13.

European finance ministers have discussed “combination possibilities” for the permanent and the temporary rescue funds ahead of a March 30 meeting in Copenhagen, Merkel said March 16. Ministers may decide to increase the region’s crisis fund to a total capacity of 692 billion euros ($911 billion) when they meet, a euro-area official said separately.

The MSCI Asia Pacific Index (MXAP) of stocks rose 0.1 percent, after the MSCI World Index climbed 2.3 percent last week.

U.S. Economy
Demand for the dollar was limited after inflation data last week rekindled expectation of additional monetary stimulus after the Fed bought $2.3 trillion of Treasuries and mortgage-backed bonds in two rounds of purchases known as quantitative easing from December 2008 to June 2010. The U.S. consumer-price index excluding food and energy costs climbed 0.1 percent in February, the Labor Department reported on March 16 in Washington, half the pace projected by economists in a Bloomberg News survey.

The Fed left unchanged March 13 its assessment that economic conditions would probably warrant “exceptionally low” interest rates at least through late 2014. It has held its target rate to a range of zero to 0.25 percent since December 2008. Dudley, vice chairman of the policy-setting Federal Open Market Committee, will discuss the regional and national economies in his speech today.

QE3 Still Possible
“Dudley could come out and say QE3 is not off the table, and the economy will need to improve a great deal for them to rule out further easing,” said Westpac’s Callow, referring to the possibility of a third round of quantitative easing. “The U.S. dollar is likely to struggle.”

The yen declined 1.8 percent in the past week, the worst performance among the 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes. The dollar lost 0.3 percent, while the euro slid 0.2 percent in the same period.

Bank of Japan (8301) Governor Masaaki Shirakawa on March 13 indicated that the central bank will keep using monetary policy as a tool to tackle deflation.

“The view that Japan has a stronger easing bias than the U.S. is still intact,” said Kengo Suzuki, a foreign-exchange strategist in Tokyo at Mizuho Securities Co., a unit of Japan’s third-largest bank by market value. “There’s still lingering downward pressure on the yen against the dollar on the back of the divergence of U.S. and Japanese central-bank policies.”

Futures traders increased bets the yen will decline against the dollar. The difference in the number of wagers by hedge funds and other large speculators on a decline in the yen compared with those on a gain -- so-called net shorts -- was 42,380 on March 13, compared with net shorts of 19,358 a week earlier, figures from the Washington-based Commodity Futures Trading Commission show.