Forex: Weekly’s review

On Monday the euro extended its decline, falling by the most in more than three months against the yen, after Standard & Poor’s placed the region’s rescue fund on negative outlook. The euro briefly extended its losses against the dollar after S&P cut its outlook on the bailout fund, the European Financial Stability Facility, to negative, reflecting a similar move on two euro-area nations that act as guarantors to the facility. The EFSF lost its top credit rating in January after earlier downgrades to France and Austria. The euro remained lower even after Germany’s lower house of parliament approved a second Greek bailout package worth 130 billion euros ($174 billion). German Chancellor Angela Merkel and euro-area leaders now shift their focus on whether to bolster the region’s bailout firewall as they prepare for a summit meeting in Brussels on March 1-2.

On Tuesday the euro strengthened against the dollar and yen on speculation a European Central Bank allotment of three-year loans to banks will bolster investor appetite for the region’s assets. After lending euro-region banks a record 489 billion euros ($658 billion) in its first longer-term refinancing operation, or LTRO, on Dec. 21, the Frankfurt-based ECB tomorrow will probably grant them another 470 billion euros this week. Using the operations, banks can borrow from the ECB at around 1 percent and invest the proceeds in higher-yielding securities such as the 10-year Italian government bond, yielding 5.35 percent. The 17-nation currency earlier pared its gain against the greenback after Irish Prime Minister Enda Kenny said the nation will hold a referendum to ratify the European fiscal compact, raising concern about the measure’s implementation.

On Wednesday the dollar rallied against the euro and yen after comments from Federal Reserve Chairman Ben S. Bernanke reduced speculation the central bank will provide more monetary stimulus. The dollar erased earlier losses after Bernanke said there are “positive developments” in the labor market, adding that “the job market remains far from normal.” Bernanke said that “in light of the somewhat different signals received recently from the labor market than from indicators of final demand and production, however, it will be especially important to evaluate incoming information to assess the underlying pace of economic recovery.”

On Thursday the dollar depreciated against the majority of its most-traded counterparts as reports showed manufacturing from China to the U.S. expanded in February, increasing speculation that global growth is on the mend. The Institute for Supply Management’s U.S. factory index fell to 52.4 in February from 54.1 in the prior month, the Tempe, Arizona-based group’s data showed. Readings above 50 signal growth. A separate report showed U.S. personal spending increased 0.2 percent in January, less than the 0.4 percent forecast in a Bloomberg survey. The U.S. grew at a “modest to moderate pace” in January and early February, fueled by manufacturers, the Fed said yesterday in its Beige Book business survey. The growth is being echoed in other parts of the world, spurring investor confidence in the global economic recovery. China’s purchasing managers’ index rose for a third month in February, increasing to 51 from 50.5 in January, the statistics bureau and logistics federation said.

On Friday the dollar rose to a nine-month high against the yen before U.S. reports next week forecast to show growth in the world’s biggest economy is gathering pace while deflation persists in Japan. The dollar gained against most major currencies after Federal Reserve Chairman Ben S. Bernanke cast doubt about a third round of asset purchases. The yen dropped against most of its major counterparts as Japan’s consumer prices decreased, fanning speculation the central bank will expand monetary easing. The euro declined a third day since the European Central Bank’s bank-loan program as a German report showed retail sales unexpectedly fell. The euro weakened versus the dollar after Germany’s statistics bureau said retail sales adjusted for inflation and seasonal swings fell 1.6 percent in January.