Wen Fighting Prices Converges With Obama on Yuan: China Credit

China, facing the fastest inflation in almost two years, is allowing the yuan to strengthen the most since 2005 even as the U.S. and Europe say Premier Wen Jiabao isn’t doing enough to let the currency appreciate.

The yuan’s 1.7 percent advance last month was the most since July 2005. Non-deliverable forwards show that traders expect it to climb another 3.6 percent in a year, the most bullish projection since November 2009. The currency’s 24 percent gain since the start of 1999 is the third-best performance among 25 emerging markets tracked by Bloomberg.

Wen, 68, is allowing the yuan to strengthen after inflation reached a 22-month high of 3.5 percent in August. The government will report Oct. 21 that consumer prices climbed 3.6 percent in September from a year earlier, according to the median estimate of economists surveyed by Bloomberg. Price increases have the potential to trigger social unrest in China, where the 1.3 billion population gets by on little more than $10 a day on average, Wen said in March.

“While there are geopolitical and political pressures for China to appreciate its currency, there are also domestic reasons, especially on the inflation angle,” said Robert Minikin, senior foreign-exchange strategist at Standard Chartered Plc in Hong Kong. The bank raised its end-2011 estimate for the yuan two weeks ago to 6.36 to the dollar from 6.50.

China, the world’s fastest growing major economy, has limited gains in the yuan to about 2 percent against the dollar since June.

Obama Criticism

U.S. President Barack Obama said last month that the yuan is kept undervalued to give Chinese exporters an unfair trade advantage. The House of Representatives passed a measure on Sept. 29 that would let American companies seek duties on imports from China to compensate for the effect of a weak yuan.

The challenge for China’s policy makers is to allow yuan appreciation that is fast enough to help curb inflation without causing a jump in inflows of foreign capital that will add to record foreign-exchange reserves and worsen asset-price bubbles. Central bank Governor Zhou Xiaochuan said on Oct. 8 that China prefers appreciation “in a gradual way,” instead of a sharp revaluation that may hurt the economy.

‘Careful Review’

Zhou, 62, reiterated last week there would be a “very careful review” of economic policy to contain inflation and prevent asset bubbles. The central bank temporarily raised reserve requirements for six large commercial banks by half a percentage point, three people with knowledge of the matter said. The People’s Bank of China declined to comment.

Five-year interest-rate swaps, the fixed rate needed to receive the floating seven-day repurchase rate, have gained 25 basis points to 2.99 percent since the start of September, according to data compiled by Bloomberg. The yield on the 3.28 percent government bond due August 2020 has climbed 18 basis points in the same period to 3.40 percent, Interbank Funding Center data showed.

The risk of insuring against a default by the Chinese government is falling. Five-year credit-default swaps contracts on the nation’s bonds fell 26 percent in the past month, the biggest drop among more than 80 nations, and ended yesterday at 54 basis points, according to data compiled by CMA and Bloomberg.

Bonds Rise

China’s $1 billion of 4.75 percent bonds due October 2013 rallied in the past month, sending the yield down 20 basis points to 1.48 percent, according to prices compiled by Bloomberg. The extra yield investors require to hold China’s debt instead of Treasuries was 88 basis points on Oct. 8, according to JPMorgan’s EMBI Global Index.

China Development Bank Corp. sold 2 billion yuan ($300 million) of three-year bonds in Hong Kong that pay a coupon rate of 10 basis points over the five-day average of the three-month Shanghai Interbank Offered Rate, according to an e-mailed statement yesterday.

Twelve-month non-deliverable yuan forwards dropped 0.07 percent to 6.4420 per dollar as of 1:13 p.m. in Hong Kong. The yuan’s rate in the spot market was little changed at 6.6710, after yesterday touching 6.6610, the highest since the central bank unified official and market exchange rates at the end of 1993.

After keeping the exchange rate stable for a decade, China from July 2005 allowed its currency to strengthen 21 percent over three years before stopping the ascent as the global financial crisis curbed exports.

Price Swings

Implied volatility on one-month dollar-yuan options, a gauge of expected swings in exchange rates, jumped to 5.1 percent on Oct. 7, the highest level since January 2009, data compiled by Bloomberg show. It was as low as 0.45 percent on Jan. 1. One-month options granting the right to buy the yuan against the dollar cost 87 basis points, or 0.87 percentage point, more than contracts that allow sales, up from a 12-month low of 20 reached on Sept. 1, the data show.

Sydbank A/S, Denmark’s third-largest bank, said China may permit as much as 5 percent yuan appreciation against the dollar in a year to reduce import costs and help contain inflation. The median forecast of analysts surveyed by Bloomberg is for the currency to climb 4.2 percent to 6.4 by the end of 2011.

‘Easily Achieved’

“A 4 to 5 percent appreciation can be easily achieved in one year’s time,” Hans Bachmann, a money manager in Aabenraa at Sydbank, which oversees $8.2 billion of assets, said in an interview. “It can help take some strength away from the export sector. If the export sector grows too fast, it will also add to overheating risks.”

The reserve-requirement increase comes after banks were ordered to set aside more funds three times earlier in the year to cool a lending boom.

Yuan positions at Chinese lenders resulting from the central bank’s foreign-currency purchases expanded by 243 billion yuan in August, the biggest increase in four months, official figures show. China’s benchmark one-year deposit rate of 2.25 percent exceeds its U.S. equivalent of 0.688 percent.

The State Administration of Foreign Exchange, the nation’s currency regulator, today pledged to crack down on speculative capital inflows in the second half of this year. The agency also said the market should shed its “one-way” expectation for yuan appreciation.

China’s foreign-exchange reserves may have surpassed $2.5 trillion in the third quarter. Currency holdings rose about $48 billion, compared with a $7 billion gain in the previous three months, according to the median estimate in a Bloomberg survey of economists before a report due this week.

There are “rising speculative capital inflows as bets on appreciation grow,” said Hu Hangyu, a Beijing-based bond analyst at Citic Securities Co., China’s largest listed brokerage. “Those who bring hot money into China can make money by simply depositing their cash at Chinese banks.”

--Judy Chen, Patricia Lui. Editors: James Regan, Sandy Hendry

Dollar to Weaken 10% to $1.50 per Euro as Central Banks Sell, Faros Says

The dollar will fall 10 percent by December against the euro, extending its biggest quarterly loss since 2002, as Asian and South American central banks sell greenbacks for Europe’s common currency, said Faros Trading LLC.

Faros, which executes currency transactions on behalf of hedge funds and institutional clients, estimates policy makers in the two regions purchase about $12 billion a day to curb the strength of their currencies and support exporters. Unwilling to hold on to dollars, the central banks then sell those greenbacks for currencies including euro, yen and sterling, it said. Faros correctly predicted in July that the euro would rise 6 percent to $1.3684 over two months.

“The real weakening of the dollar is coming from Asian central banks who are essentially selling the dollar every single day as they get out of the dollars that they’re buying through intervention in Asia,” said Douglas Borthwick, Stamford, Connecticut-based head of trading at Faros. “We see continued dollar weakness going forward and expect the euro to strengthen a further 10 percent through the end of the year.”

The dollar traded at $1.3656 per euro as of 6:44 a.m. in Tokyo, falling for a third straight week. A decline of 10 percent to exceed $1.50 would see the greenback trading at its lowest level since December 2009.

The U.S. currency climbed as high as $1.1877 per euro on June 7, the strongest since March 2006, as concerns over budget deficits in nations including Greece, Portugal and Spain prompted speculation among investors that the European Union’s currency was in danger of collapse.

Currency Reserves

The dollar’s share of global foreign-exchange reserves rose in the second quarter as investors sought safe assets at the height of the European crisis. Allocations climbed to 62.1 percent in the second quarter from 61.7 percent in the previous three months, the International Monetary Fund reported yesterday. That was down from the 62.8 percent held in the same period a year ago.

The euro’s share declined to 26.5 percent from 27.2 percent in the previous quarter and an all-time high of 27.8 percent in the three months ended Sept. 30, 2009. The yen’s share rose to 3.3 percent from 3.1 percent.

The euro has climbed 15 percent since its June low after European officials unveiled in May a 750 billion euro ($1 trillion) backstop to blunt the sovereign-debt crisis and restore confidence in the common currency.

Diversification away from the dollar will begin to register in IMF reserves data amid selling by Asian and South American central banks, Borthwick said.

Quantitative Easing

Faros expects the dollar to also weaken as the Federal Reserve announces another round of so-called quantitative easing asset purchases to spur growth and support prices. The Dollar Index, which tracks the greenback against the currencies of six trading partners, has dropped 3.3 percent since Fed policy makers signaled Sept. 21 their willingness to expand monetary policy stimulus.

Policy makers said that day they were “prepared to provide additional accommodation if needed to support the economic recovery and to return inflation, over time, to levels consistent with its mandate.”

The policy-setting Federal Open Market Committee next meets Nov. 2-3 in Washington.

Pound Rises Against Dollar, Yen on Stock Gains; Gilts Decline

The pound rose against the dollar and the yen, fueled by gains in stocks and signs the global economic recovery is being sustained.

The pound also strengthened against 14 of 16 most active currencies as a report showed China’s manufacturing expanded at the fastest pace in four months in September and Fitch Ratings boosted its 2010 growth forecast for the U.K. The FTSE 100 Index jumped 0.9 percent, snapping two days of declines.

“The data from China suggests that perhaps the pessimism in the market about the global economy has gone too far,” said Jane Foley, a senior currency strategist at Rabobank International in London. “It injects some risk appetite into the market, and the pound reacts positively to that.”

The pound increased 0.7 percent against the dollar to $1.5832 as of 1 p.m. in London. Sterling jumped 5.2 percent in the third quarter, its biggest three-month gain since the period ended June 2009. It traded 0.4 higher against the yen at 131.8.

Gilts fell as gains in stocks reduced bids for fixed-income securities. The yield on the 10-year gilt climbed 4 basis points to 2.99 percent, and the two-year yield was up 2 basis points, to 0.67 percent.

An index of U.K. manufacturing growth dropped to a 10-month low last month, with the gauge falling to 53.4 from a revised 53.7 in August, data from the Chartered Institute of Purchasing and Supply and Markit Economics said today. The median estimate of 23 economists in a Bloomberg News survey was for a reading of 53.8. A measure above 50 indicates expansion.

Weekly Move

Gilts handed investors a 3.8 percent return in the third quarter, beating a 2 percent gain from German bonds and a 2.7 percent increase from U.S. Treasuries, according to indexes compiled by Bank of America Merrill Lynch.

Further gains in the pound may be limited. The currency is headed for a weekly loss against 14 of 16 most active currencies on speculation that the Bank of England will soon resume its bond-purchase program to support the economy. The so-called quantitative easing may undermine sterling as it’s seen as inflationary.

Policy maker Adam Posen said this week that Bank of England officials should discuss more bond purchases. The British Chambers of Commerce, a lobby group representing 100,000 companies, gave its backing to Posen’s idea.

“Adam Posen is right, BCC Chief Economist David Kern said in an interview in London. “All the evidence that we have suggests growth is slowing. Possibly as early as November we will get more quantitative easing.”

The pound has fallen 4.4 percent against developed-world currencies so far this year, according to Bloomberg Correlation- Weighted Currency Indices.

‘Global Factors’

Gilts declined alongside AAA-rated German bonds and French government securities as peripheral bonds, including those issued by Spain and Ireland, rallied amid signs that Europe’s high-deficit countries are tackling their crises.

Ireland’s government said yesterday it’s preparing to take majority control of Allied Irish Banks Plc and pump extra cash into Anglo Irish Bank Corp. to draw a line under its financial crisis.

“Gilts have fallen on global factors,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “Data-wise, Europe’s doing well and plans have been announced that have given the market that bit of belief that maybe there is a way out of it. It’s taken a little bit of the edge off the gilt market.”

Demand for Europe’s safest assets also declined as European Central Bank Governing Council member Ewald Nowotny said the central bank will continue buying government bonds from countries with fiscal problems as long as there are inefficiencies in the markets, Wirtschaftwoche reported, citing an interview.

“Markets are exaggerating the risk premiums” for government bonds for countries including Ireland and Portugal, Nowotny was cited as saying. “As long as these inefficiencies prevail, we will correct them.

Merkel Straddles Fences After Euro's Near-Death Experience

For a fleeting moment last spring, it was possible to believe that Europe’s economic crisis had turned Angela Merkel into a true believer in the European cause.

Three days after putting up the biggest chunk of a 750 billion-euro ($1 trillion) package to save Europe’s common currency from the Greek financial contagion, the German chancellor gave voice to a set of pro-European musings straight out of the post-World War II dream factory, Bloomberg Businessweek reports in its Oct. 4 issue.

European unity, she said in a May 13 speech, is the “most tantalizing, magnificent, auspicious idea.” Not only must Europe forge a genuinely integrated economy, she declared, but it needs “a common European army.”

Reality soon burst the bubble. Beer-garden rage at the idea of throwing hard-earned German money after bad Greek debt gave Merkel’s popularity numbers a kick. If an election were held today, polls show, Germany’s first woman leader would not win. It’s a reminder that in Germany, which is still straining under the financial and social costs of unification, good deeds that further the cause of Europe offer no political payoff. The people who shattered Europe, then helped rebuild it, like the Continent just the way it is.

“Even in the absence of this crisis, Germany would be placing itself in the camp of the stand-pat, conservative powers,” says Jeffrey J. Anderson, a professor at the Georgetown University School of Foreign Service in Washington. A rebounding economy gives Germany “even less incentive to do anything risky on the European front. The Germans are standing back and saying: We fixed our problems with fiscal rectitude and a sober, conservative approach, and the rest of you ought to be following suit.”

Post-War Leaders

A child of Communist East Germany, Merkel, 56, lacks the emotional roots of the war-scarred German generation that built the European Union to be more than a marketplace. Konrad Adenauer bound Germany to the West in part to protect his country from itself. Helmut Kohl regarded German and European unity as two sides of the same coin--a coin that he made sure was denominated in euros. It is this legacy that Merkel is now struggling to uphold.

Merkel, a trained physicist, had her political awakening when the Berlin Wall fell. Within a year she was in the first all-German government as minister for women and youth, courtesy of Kohl’s eye for eastern talent. Her rise was so quick that she skipped the intensely local politics that gave her predecessors grassroots credibility. She also displayed a ruthless streak. When news broke in 1999 that Kohl had run a slush fund during 16 years as chancellor, Merkel, by then secretary-general of the Christian Democratic Union, publicly denounced her mentor.

Tied to Euro

Now Merkel is bound by the institutions Kohl created: the EU and the euro. As Greece veered toward default and threatened to drag Spain, Ireland, and Portugal down with it, the pressure on the euro drove the equivocating Merkel to rescue the system not because she loves Europe, but because Germany is its leading beneficiary.

While Kohl battled to keep German and European interests in perfect alignment, he was also the consummate domestic political opportunist. He dodged and weaved for months in 1990 before recognizing Poland’s border with Germany as inviolable--the same kind of fence-straddling Merkel was accused of when Greece pleaded for help. And by the end of his tenure in 1998, Kohl, with his treasury buckling under the cost of subsidizing the East, was making idle threats to stop paying into the EU budget.

‘Massively Exaggerated’

So when critics--including many from her Christian Democratic base--expressed outrage over Merkel’s handling of the debt shock, the complaints were “massively exaggerated,” says Horst Teltschik, 70, a Kohl confidant who negotiated German unification. “It would be superhuman to act immediately and know all the answers in such a crisis. Helmut Kohl wouldn’t have done it differently. Just like Chancellor Merkel, he would have been willing to take risks in order to preserve the euro.”

Merkel, the overnight political phenomenon, lacks her patron’s gift for milking a European crisis for gains at home, and now she is paying the price. In May the CDU lost control of North Rhine-Westphalia, Germany’s largest state, and with it a majority in the upper house of Parliament. A rare contested vote almost upended Merkel’s candidate for Germany’s ceremonial presidency. Battles with her coalition allies over taxes stirred talk of a leadership vacuum less than a year into her second term.

The fiscal crisis and cleanup operation confirmed Germany’s preeminence in Europe. It also made the German people even more hesitant to embark on new EU ventures: 53 percent regard the euro as a “bad thing,” according to a June poll by the German Marshall Fund of the U.S.

Reluctant Leader

Merkel is not the only reluctant leader the country has seen. Hesitancy was hardwired into Germany’s postwar politics as the nation did penance for the crimes of the Nazi regime. Its response was to wield power through the EU, in tandem with former archenemy France. That worked as the EU grew from 6 countries in 1957 to 15 in 1995, and it worked for the creation of the euro in 1999. But things are different in today’s larger bloc.

Defeats for German-French projects used to be rare; now they are increasingly common, as when other governments rejected France and Germany’s argument for a European financial transaction tax on Sept. 7. “For a long time the German-French relationship has been much more appearance than reality,” says Guenter Verheugen, 66, Germany’s EU commissioner from 1999 to 2010. “The days are gone when a German-French directorate could set the course of European integration.”

More Than Numbers

It’s not only a numbers game. German and French interests have been drifting apart since the end of the Cold War. As France tapped on the brakes, Germany was the prime mover behind the EU’s expansion to the east, seeing it not only as a moral imperative but as good for business. Eastern Europe bought 11 percent of German exports in 2009, trumping the U.S.’s 7 percent share. The eastward shift in the EU’s center of gravity also reestablished Germany’s buffer zone to Russia.

As doubts swirled around the euro, the French were the first to accuse Germany of having benefited unfairly. Europe’s economic imbalances weren’t due only to peripheral countries living beyond their means, French Finance Minister Christine Lagarde said in March. Germany was also at fault for saving too much, the argument went, spending too little, and getting rich off exports to the rest of Europe.

Export Engine

Merkel bristled at the charge that Germany, by boosting its industrial competitiveness, was winning a zero-sum European game. One prong of Germany’s export model is to invest in factories abroad. Some 64 percent of that investment is in the EU, sustaining 2.9 million jobs, according to Bundesbank data.

“The export model directly benefits other countries,” says Heleen Mees, a researcher at the Erasmus School of Economics in Rotterdam. “It’s very worthwhile for those countries to have German factories and technologies.”

Merkel has won on one point. As the EU tries to strengthen the euro region’s financial management, the onus is on weaker countries to improve how they do things, not on Germany to abandon fiscal rigor and loosen the lid on wages. Yet that’s about the only point she has taken so far. German calls for harsher sanctions on deficit offenders face resistance, and German pleas for an “orderly” default mechanism for debt- swamped countries are going nowhere.

Enthusiasm Wanes

It’s no wonder that German enthusiasm for Europe has soured, with the proportion calling EU membership a “good thing” plunging to 50 percent from 60 percent in an EU poll in May. That attitude underpins a tough German stance against increasing the EU’s annual 123 billion-euro budget. Grand European projects --- such as joint bond issuance or a centralized foreign or immigration policy --- fail to excite a country that, after centuries of strife, is at last satisfied with its place on the map.

While consenting to the EU’s unhurried expansion to the Balkans, Merkel has transformed Germany from being a supporter of Turkish membership to a die-hard opponent. The best Turkey can hope for is a “special relationship,” she said in Istanbul in March. Even in her Europe-of-the-future speech in May, the message was that the EU had enlarged too far and too fast.

What about the Europe of the present? It can look to Merkel’s Germany for crisis management, if not for bold steps that go beyond the status quo. “When the crunch comes and there’s a crisis, Europe takes action,” says Hans Eichel, 68, German Finance Minister from 1999 to 2005. “I’d like to see us make progress not only when there’s a crisis, but day in and day out. For that we need politicians with a passionate commitment, not politicians who just react to crises.

Dollar Drops to Six-Month Low as Investors Seek Higher Yields

The dollar fell to the lowest level since March versus the euro and dropped against the yen as signs the global economic recovery will be sustained buoyed investor appetite for higher yields.

The U.S. currency fell against all of its most-traded counterparts as Federal Reserve Bank of New York President William Dudley said more action from the central bank to support the economy is needed. The U.S. currency has declined 1 percent against the yen and 1.8 percent versus the euro this week. U.S. stocks and commodities jumped as consumer spending and incomes rose in August more than forecast.

“The dollar is being sold on an across-the-board basis as investors search for yield,” said Michael Woolfolk, senior currency strategist in New York at Bank of New York Mellon Corp., the world’s largest custodial bank, with more than $20 trillion in assets under administration. “With the Fed upping the ante by saying they’re keeping the door open for quantitative easing, that is not only introduced an element of additional risk and uncertainty, but likely pushed off the day of reckoning for raising interest rates.”

The dollar declined 0.9 percent to $1.3755 per euro at 10:07 a.m. in New York, from $1.3634 yesterday. It touched $1.3764, the weakest level since March 17. The U.S. currency dropped 0.3 percent to 83.25 yen, from 83.53 yen, after falling to 83.16 yen, the lowest level since Japan intervened in foreign-exchange markets on Sept. 15. The euro advanced 0.5 percent to 114.55 yen, from 113.88 yen.

Weak Dollar

“We now have some of the clearest dollar-weakness trends in place we’ve seen for a while,” said Jens Nordvig, a managing director of currency research in New York at Nomura Holdings Inc. “The euro is clearly back as the anti-dollar and as you continue to get the news from the Fed that point towards QE2 being imminent, that is feeding dramatically in to euro strength.”

U.S. consumer purchases rose 0.4 percent for a second month, Commerce Department figures showed today in Washington. The gain exceeded the 0.3 percent increase projected by the median forecast of economists surveyed by Bloomberg News. Incomes were up 0.5 percent, the biggest advance this year, propelled by the resumption of extended and emergency unemployment benefits.

Factory Pace

The Institute for Supply Management’s factory index fell to 54.4 in September from 56.3 a month earlier, the Tempe, Arizona- based group said today. Readings greater than 50 signal growth.

Economists forecast the gauge to drop to 54.5, according to the median of 83 projections in a Bloomberg News survey. Estimates ranged from 51.5 to 57.

The Standard & Poor’s 500 Index rose 0.5 percent, building on the best September rally since 1939.

The Reuters/Jefferies CRB Index of raw materials added 0.5 percent as oil rose to a seven-week high after economic data from the U.S. and China bolstered optimism that demand is growing. Crude for November delivery climbed as much as 1.5 percent to $81.40 a barrel, the highest price since Aug. 10.

Asian currencies headed for a fifth weekly advance, the longest winning streak since March, after data showed Chinese manufacturing improved.

China’s purchasing managers’ index rose to 53.8 in September from 51.7 in August, the nation’s logistics federation and statistics bureau said in an e-mail. The median forecast of 15 economists surveyed by Bloomberg News was 52.5, with none forecasting such a large gain. Readings above 50 indicate expansions.

Australian Dollar Falls From Near Two-Year High After Home Approvals Drop

Australia’s dollar fell from near a two-year high after a government report home-building approvals dropped in August, giving the central bank more reason to delay raising interest rates next week.

New Zealand’s currency weakened for a second day after data showed home building permits dropped to the lowest in 13 months. The Australian dollar was still within 2 U.S. cents of the strongest since it was allowed to float freely in 1983 as the extra yield on the nation’s two-year notes over similar maturity Treasuries was near the highest since June 2008.

“This will take some of the heat out of the argument about how well the Australian economy is going,” said Michael McCarthy, head of Asia-Pacific dealing at City Index Ltd. in Sydney. “The Aussie is holding fairly firmly although we’ve pulled back from the highs above 97 cents -- there doesn’t seem to be much downward momentum at the moment.”

Australia’s dollar fell to 96.65 U.S. cents as of 4:04 p.m. in Sydney from 96.97 cents in New York yesterday, when it rose to 97.30 cents, the strongest since July 2008. The currency has climbed 8.5 percent this month and 15 percent since June 30. The so-called Aussie declined 0.8 percent to 80.53 yen.

New Zealand’s dollar dropped 0.3 percent to 73.55 cents, paring its advance this quarter to 7.4 percent. The currency slid 0.8 percent to 61.28 yen.

The number of permits granted to build or renovate houses and apartments in Australia dropped 4.7 percent in August, the Bureau of Statistics said in Sydney. Economists surveyed by Bloomberg had forecast them to be unchanged.

Rate Bets

Swaps traders reduced to 52 percent the chance the Reserve Bank of Australia will raise borrowing costs at its next meeting on Oct. 5, according to a Credit Suisse AG index, from a 64 percent probability yesterday.

Benchmark interest rates are 4.5 percent in Australia and 3 percent in New Zealand, compared with 0.1 percent in Japan and as low as zero in the U.S., attracting investors to the South Pacific nations’ higher-yielding assets. The risk in such trades is that currency market moves will erase profits.

Australia’s dollar rose to 98.50 U.S. cents on July 15, 2008, the strongest since it was trade freely in 1983.

Sell Aussie

Australia & New Zealand Banking Group Ltd. recommended investors sell the Aussie as it approaches 98.50 cents as worsening perceptions around Europe’s sovereign debt damp demand for higher-yielding assets.

“The market is ignoring flaring concerns in Europe, particularly in the periphery, and they seem to be getting worse by the day,” said Grant Turley, a senior foreign-exchange strategist with ANZ in Sydney. “We’re expecting a shallow pullback to the low 90s.”

Investors should purchase the currency if it falls to that level, the bank said, as it predicted the currency will climb to parity versus the U.S. dollar in 2011.

Australia’s dollar is the second-best performer versus the greenback this quarter on speculation the Federal Reserve will expand stimulus measures to support growth. Demand has also been bolstered as economists forecast the Reserve Bank of Australia will raise its benchmark to 4.75 percent next week.

“If the RBA raises rates next week and the Fed does quantitative easing in November, then this could be the catalyst to push the Aussie toward parity,” said Richard Grace, chief currency strategist in Sydney at Commonwealth Bank of Australia, the nation’s largest lender.

Approvals for home-building in New Zealand slumped 17.8 percent in August to the lowest since July last year, Statistics New Zealand said today, citing seasonally adjusted figures.

New Zealand’s two-year swap rate, a fixed payment made to receive floating rates, was little changed at 3.67 percent.

Bank of Tokyo Mitsubishi Says Sell Euro, Dollar's Weakness is `Excessive'

Investors should sell the euro against the dollar, betting the single currency will decline to $1.2650, because speculation the Federal Reserve will increase asset purchases pushed the U.S. currency too low, Bank of Tokyo- Mitsubishi UFJ Ltd. said.

“The fear of quantitative easing is now approaching excessive levels,” Lee Hardman, a strategist in London, wrote in a research note today. “We recommend taking advantage of excessive dollar pessimism to position for the euro’s renewed descent.”

The euro rose 0.3 percent to $1.3663 as of 11:10 a.m. in London.