Euro Gains as European Economy Contracts Less Than Forecast

London -- The euro strengthened for a third day against the dollar after a report showed Europe’s economy shrank less than economists predicted in the second quarter, and France and Germany unexpectedly grew.

The common currency also gained for a second day versus the yen after the European Union’s statistics office in Luxembourg said gross domestic product fell 0.1 percent from the first quarter. Analysts estimated a decline of 0.5 percent in the period, a Bloomberg survey showed. The dollar fell against 14 of the 16 major currencies after the Federal Reserve said yesterday it will keep interest rates low for an “extended period,” diminishing the appeal of U.S. assets.

“We’re getting pretty excited about these numbers, seeing big hitters in euro land moving back into the black, and that’s why the euro is higher,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “We’re in a risk-on mode today.”

The euro strengthened to $1.4262 as of 7 a.m. in New York, from $1.4188 yesterday. It advanced to $1.4447 on Aug. 5, the highest level since Dec. 18. The common European currency may reach $1.50 in the first three months of 2010, Jones said. Europe’s currency climbed to 137.34 yen, from 136.32 yen. The yen traded at 96.28 per dollar, from 96.06.

Europe’s Dow Jones Stoxx 600 Index gained 1.4 percent and U.S. stock futures advanced. The MSCI Asia-Pacific Index of regional shares rose 1.6 percent.

Economic Growth

South Korea’s won led Asian currencies higher as signs the global economy is improving boosted regional stocks. The won advanced 0.7 percent at 1,237.35 per dollar, the Malaysian ringgit gained 0.5 percent to 3.5140, and Indonesia’s rupiah climbed 0.5 percent to 9,950.

The euro also strengthened after Germany’s Federal Statistics Office said gross domestic product expanded a seasonally adjusted 0.3 percent from the previous three months. France’s economy rose 0.3 percent in the second quarter, national statistics office Insee said today in Paris. Economists expected the German and French economies to shrink by 0.2 percent and 0.3 percent, respectively, according to separate Bloomberg surveys.

The data “may really lend credence to the view that we could be reaching a bottom,” Ashraf Laidi, chief market strategist at CMC Markets in London, said in an interview on Bloomberg Television. “In the short term we might see a nice pop in the euro.”

Dollar Index

The European economy may return to growth sooner than expected and inflation risks should not be underestimated, European Central Bank Executive Board member Juergen Stark said, according to a report in Boersen-Zeitung yesterday.

The data is “definitely good news, which should display a welcome impact also on next quarter’s figures,” Aurelio Maccario, chief euro-area economist in Milan at Unicredit Group in Milan, wrote in a research note today. “Markets should probably start positioning for a change in the rhetoric of some ECB governing council members in the fourth quarter of this year if things keep going this way.”

The Dollar Index dropped for a third day after the Fed said in a statementfollowing its two-day meeting that the economy is “leveling out.” The Fed said it will “gradually slow” its purchases of government securities as it aims to purchase as much as $300 billion of bonds by the end of October, ending the program a month later than expected. The central bank has left its target rate for overnight lending between zero and 0.25 percent since December.

‘Upside Risks’

“There may be upside risks to the U.S. economic outlook,” said Toshihiko Sakai, head of trading for foreign exchange and financial products in Tokyo at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s largest publicly traded bank. “Risk- taking appetite is returning and the bias is for the yen and the dollar to be sold.”

The Dollar Index, which the ICE uses to track the dollar against currencies of six major U.S. trading partners such as the euro, fell to 78.526, from 78.790 yesterday, after dropping to 78.502, the weakest level since Aug. 7.

“The dollar’s going to remain a low-yielding currency for a period of time, and the Fed will do anything they can to nurture the economy,” said Sean Callow, a currency strategist at Westpac Banking Corp. in Sydney. “That combination’s a positive one for Asian currencies, even if it’s not a surprise. The trend toward risk appetite is intact for the near-term.”