Euro Strategists Draw Line at $1.34 as Merkel Seeks Rescue - San Francisco Chronicle

(Updates prices in eighth paragraph.)

Oct. 24 (Bloomberg) -- Foreign-exchange strategists have ceased cutting forecasts for the euro as European government officials intensify efforts to end the region's crisis and traders pare bets for a collapse in the currency.

Between Sept. 12 and Oct. 6 the median year-end estimate of more than 40 analysts surveyed by Bloomberg tumbled to $1.35 from $1.43. It has ranged between $1.34 and $1.35 since then. The 17-nation currency, which closed at $1.3896 on Oct. 21, has strengthened 2.5 percent from last month's low on Sept. 12 against a basket of developed-nation peers measured by Bloomberg Correlation-Weighted Indexes.

For all the concern that European officials led by German Chancellor Angela Merkel and French President Nicolas Sarkozy may not be able to fix the region's sovereign debt crisis, the $4 trillion-a-day currency market is signaling that the worst may be over for the euro. Leaders meeting yesterday outlined plans to aid banks and ruled out tapping the European Central Bank's balance sheet to boost its rescue fund.

"There's a clear sign of commitment by policy makers to support the euro project and as such the euro is not going to be allowed to collapse," Dale Thomas, head of currency management at Insight Investment Management Ltd. in London, which has about $220 billion in assets under management, said in a phone interview Oct. 21. "It's quite possible that we will get some more near-term euro strength."

Options traders are becoming less bearish on the euro. They are paying 3.42 percentage points more for the right to sell the common currency against the dollar than they are to buy it. The so-called one-month 25-delta risk reversal rate has narrowed from a closing-price record 4.03 on Sept. 6.

'Wants to Believe'

"For now the market really wants to believe in a solution and there's an unwinding of the previous pessimism" toward the euro, John Hardy, the head of foreign-exchange strategy at Saxo Bank A/S in London, said in a telephone interview on Oct. 19.

The euro will end the year at $1.30, the "risk" is that it may end stronger "if the market finds more confidence in Europe," Hardy said. Current talks are "designed to be an impressive show of force to restore confidence," he said.

The euro was little changed last week, or 15.5 percent stronger than its average of about $1.2030 since January 1999 and up from this year's low of $1.2867 in January. It fell 1.15 percent to 105.97 yen. That compares with an average of 128.68. The euro was little changed at $1.3890 at 1:35 p.m. in Tokyo.

Bearish Euro Bets

Traders are already trimming bearish bets that would profit from a weakening currency, and anything less than a collapse in the talks may cause them to reduce those positions further.

The difference in the number of wagers by hedge funds and other large speculators on drop in the euro compared with those on an advance was 77,720 on Oct. 18, compared with so-called net shorts of 82,697 in the period ended Oct. 4, which was the most since June 2010, according to data from the Commodity Futures Trading Commission in Washington.

"A plan takes some of the uncertainty away and that is positive for the euro," Pierre Lequeux, head of currency management in London at Aviva Investors, which manages about $410 billion, said in a telephone interview on Oct. 21. "I am a bull because I think that the market has been very anti-Europe over the last year."

Europe's 13th crisis-management summit in 21 months excluded a forced restructuring of Greece's debt, sticking with the policy of enticing bondholders to accept "voluntary" losses to help restore the country's finances. The complete blueprint won't come together until the next summit on Oct. 26.

German Aim