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The euro’s two-month rally against the dollar is running into renewed rifts over Europe’s sovereign debt crisis just as optimism about the U.S. economy increases.
Bolstered by the prospect of higher European Central Bank interest rates as soon as next month, the euro has appreciated almost 9% against the dollar from this year’s low. Bets by futures traders on more strength are at levels that indicated reversals in the past.
Moody’s Investors Service today cut Greece’s government bond ratings by three steps to B1 from Ba1, and assigned them a negative outlook, meaning they are more likely to be downgraded further than be raised them or kept unchanged.
Portuguese bond yields have risen to levels that preceded last year’s bailouts of Ireland and Greece, both of which are trying to renegotiate terms of their rescues.
“The European crisis isn’t over,” said Andrew Balls, the London-based head of European portfolio management at Pacific Investment Management Co., which runs the $237 billion Total Return Fund, the world’s biggest bond fund. “The euro-dollar exchange rate has been driven more by relative interest-rate outlooks, but the public statements ahead of the forthcoming meetings suggest that hopes for a grand bargain may be overdone.”
Strength in the euro has focused on the dollar as Fed Chairman Ben S. Bernanke shows no signs of raising borrowing costs even though the economy is strengthening.
Growth in the U.S. will total 3.2% this year. The European Commission raised its growth forecast to 1.7% last week and said higher oil and commodity prices may keep inflation above the ECB’s 2% limit for most of the year.
A day later, Commerzbank AG strategist Ulrich Leuchtmann in Frankfurt said the currency’s gains may end amid investor pessimism that the EU’s leaders will solve the region’s debt crisis. Last week’s rally isn’t the beginning of an “uptrend,” Bilal Hafeez, London-based head of foreign-exchange strategy at Deutsche Bank AG, wrote in an investor note March 4.
Speculators have become so bullish on the euro that past trading trends suggest they may start reversing those bets. The number of contracts that hedge funds and other large speculators hold at the Chicago Mercantile Exchange anticipating a gain in the single currency jumped to 51,308 as of March 4, according to the Washington-based Commodity Futures Trading Commission.
The last time so-called net longs exceeded 45,000 contracts was in October. The following month the euro weakened 6.9% against the dollar. They also topped the 45,000 mark a year earlier, just before the currency began about a six-month, 21% decline.
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