Category Archives: Currencies

Indian Firms Risk Dollar Debt Default as Rupee Slides

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Another region with a private sector dollar short to worry about.

Seems the world is short dollars and euro?

Indian Firms Risk Dollar Debt Default as Rupee Slides

By James Fontanella-Khan

November 29 (FT) — Dozens of Indian companies are coming under financial stress after the sharp fall of the rupee against the dollar during the past few months made once-cheap loans in the US currency much more expensive, analysts have warned.

Indian companies face an overall short-term foreign debt maturity of $16bn for the year ending in March 2012 – according to Crisil, the Indian subsidiary of the US credit rating agency Standard & Poor’s – the majority of which is US dollar-denominated.

The most common forms of the debt are foreign currency convertible bonds, which can either be converted into a lucrative stake in the issuer on maturity, which is attractive if the issuer’s shares rise, or simply repaid in full.

Many Indian companies resorted to the FCCBs as a convenient way to raise cheap debt when the country’s stock markets were gripped by exuberance between 2005 and 2008, with the main Sensex index peaking in November last year at more than 21,000 points.

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Blog Comment on Italy

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This was recently posted by a reader:

I’m from Italy so I can answer your question. The general and most accepted ideas in Italy are:

  • “The problem is president Berlusconi.”
  • “We need structural reforms!” (In every pub people love to say that, to feel themselves intelligent, the same that are in precarious financial conditions.)
  • “We are not credible.”
  • “We live beyond our means.”


And the best:

  • “Without the Euro it would be a catastrophe, fortunately, we have a strong currency.”

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ECB allowing corporate accounts threatens Germany

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First, I don’t have confirmation this is happening the way it’s being reported.

But if it is, it opens the door for German rates to rise with credit concerns.

Without direct ECB accounts, holders of euro balances have only credit sensitive options as depositories for their funds.
These include euro banks, where deposit insurance is only via their national govt., corporate liabilities including debt and equities, and national govt. debt.

With nowhere else to go, and Germany perceived as the safest of the lot, and therefore German yields have plunged relative to other debt instruments as risk perceptions have escalated.

However, if private companies can bank directly at the ECB, Germany can quickly lose it’s TINA (there is no alternative) status, and instead be valued as an alternative to an actual ‘risk free’ depository- the ECB itself- putting Germany in the same boat with the other member nations.

Additionally, the time seems right for a new (private sector) euro member bank to emerge that’s a pure ‘depository bank’ with its assets limited to deposits at the ECB, charging its depositors a fee for this service, much like a money market fund. This, too, would have the same effect on Germany.

So while Germany is the strongest of the euro member nations, it is none the less not the issuer of the euro, and has debt ratios that are far higher than what markets would ordinarily fund for non issuers of a currency. However, as long as it continues as the ‘investment of last resort’ for holders of euro rates can remain far lower than otherwise.

Siemens Shelters Up to $8 Billion at ECB
Published: Tuesday, 20 Sep 2011 | 12:46 AM ET

 
Siemens withdrew more than half-a-billion euros in cash deposits from a large French bank two weeks ago and transferred it to the European Central Bank, in a sign of how companies are seeking havens amid Europe’s sovereign debt crisis.

 
The German industrial group withdrew the money partly because of concerns about the future financial health of the bank and partly to benefit from higher interest rates paid by the ECB, a person with direct knowledge of the matter told the Financial Times.

 
In total, Siemens has parked between 4 billion euros ($5.4 billion) and 6 billion euros at the ECB’s facilities, mostly through one-week deposits, this person said. Only a handful of large companies have the banking licences that allow them to deposit cash directly with the ECB.

 
Siemens’ move demonstrates the impact of the eurozone’s deepening sovereign debt crisis on confidence in European banks.

 
It was not clear from which bank Siemens withdrew its deposits. A person familiar with BNP Paribas said, however, that it was not the bank involved.

 
Siemens and the ECB declined to comment.

 
The company’s move came almost a year after Europe’s largest engineering conglomerate prepared itself for a future financial crisis by launching its own bank, an unusual move for an industrial group outside the car sector, where companies run big car financing and leasing businesses.

 
In an interview last December, Roland Châlons-Browne, chief executive of Siemens’ financial services unit, said its banking business would enable the group to tap the central bank for liquidity and deposit cash at the ECB.

 
“In the case of another financial crisis, we will be able to broaden our flexibility and take out risk with our own bank,” Mr Châlons-Browne said at the time.

 
Siemens does not only use the ECB as a haven; it also gets paid a slightly higher interest rate than it would get from a commercial bank.

 
The ECB paid an average interest rate last week of 1.01 percent for its regular offers of one-week deposits, under which it withdraws from the financial system an amount of liquidity equivalent to the amount it has spent on eurozone government bonds.

 
That compares with an average overnight interest rate paid by eurozone banks of 0.95 percent.

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The UMKC Buckaroo- A Currency Model for World Prosperity

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It’s been more than 10 years since the economics department at UMKC (University of Missouri at Kansas City) introduced its own currency.
It’s called the buckaroo, named in sync with the school mascot, the kangaroo.
It all began when the department indicated a desire to have students contribute their time to community service.
I suggested they do it by introducing a new currency, which would both, for the most part, accomplish the intended purpose and give the students and up close and personal knowledge of currency dynamics.

It works something like this:

All students are required to submit 20 buckaroos by the end of the semester to get their grades.
Buckaroos can be earned by doing designated community service jobs.
There is no limit to how many buckaroo a student may earn.
Buckaroos are freely transferable.

First, a bit of history. In the late 1990’s, when the program began, it was reported that students had exchanged buckaroo with each other at a price of $5 each.
More recently, buckaroo have been reportedly exchanged for $15 each.

Therefore, the buckaroo has problably been the strongest ‘paper currency’ in the world, outperforming the S and P and most other investements.

There has always been ‘full employment’ in that any student can work for and be paid buckaroo at the designated community organizations without limit.

There has been a 0 interest rate policy since inception, in that the UMKC does not offer interest bearing buckaroo deposits.

The UMKC has run a continuous fiscal buckaroo deficit in that, from inception, it has always spent more buckaroo than it has collected.

The value of the buckaroo has been ‘internally stable’ from inception, in that one buckaroo has always been able to purchase 1 hour of student labor.

The buckaroo has been operating continuously in a small, open economy, with multiple other currencies trading around it simultaneously.

There has been continuous full employment with no capital controls, no trade restrictions, and no banking arrangements.

Furthermore, it has been obvious to the students that:

The buckaroo is a (simple) case of a public monopoly.
The UMCK’s buckaroo fiscal deficit is exactly equal to the buckaroos saved by the students and their associates.
The value of the buckaroo is a function of what the students have to do to earn a buckaroo from the UMKC.
The buckaroo functions first to move student labor from private to public domain.
The buckaroo has operated and sustained its public purpose independently of foreign central bank policies.

Additionally, the students have recognized how variations in outcomes from the utilization of other currencies
can be traced directly to variations in the policies of the issuers of the various currencies.

For example, it’s obvious to the students that if the UMKC attempted to run a fiscal surplus- spend fewer than the 20 buckaroo per student it required as payment to get one’s grades- the results would be highly problematic and counter to public purpose.

It’s also obvious to the students that if, for example, the UMKC started paying 2 buckaroo per hour rather than 1, the buckaroos would probably
exchange for $7.50 each rather than the current $15.00 each.

They also recognize how problematic it would be if UMKC limited its total buckaroo spending
to anything less than what the students wanted to earn
to be able to both pay the required tax of 20 buckaroo and save buckaroo as they may desire.

And they also recognize that if the UMKC decided to buy other goods and service with buckaroo from willing sellers,
they could do that, but that said purchases would tend to reduce the student labor that the community service providers would attract.

The UMKC, as well as the students, have failed to identify any public purposes that may be served by having the UMKC pay interest
on buckaroo savings, so the 0 interest rate policy remains in place.

The students fully recognize that if the UMKC ends the 20 buckaroo tax, the buckaroo will have no further value.

The students have gained an awareness of how, for example,
wealthy students can opt out of community service by purchasing buckaroo from more needy students.

They have reconized how the issues of theft and corruption influence the currency and people’s lives.

In general, the buckaroo as been a fully functioning currency that has directed student labor to community service,
and at the same time provided an invaluable educational experience to the students.

And it’s also made it obvious that the world’s leaders and their economists are necessarily subversive and/or ignorant.

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Deflation rearing its ugly head and the euro is up

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Interesting day so far.
Stocks down, interest rates down, commodities down, including gold (seems the found Hugo’s gold?) but the euro is up some, after falling some last week.

With federal deficits too low most everywhere, it’s like a general crop failure, with the question being which crops will go up the most vs each other.

Not easy to say, but the euro has to be a bit of a favorite given the sincerity and intensity of their commitment to austerity/deficit reduction? And their new good buddies, the Swiss, now helping out by buying euro as others buy their currency with their new cap in place.

However lower crude and product prices do help the US more than the rest, so that’s a factor that gives the dollar an edge. And the portfolio shifting/speculation/trend following in illiquid markets can overpower the underlying fundamentals as well medium term.

And the dollar and the euro are seeing bids from China and Japan now and then as those nations work to protect their softening export markets.

My least favorite currency longer term may be the yuan, with its inflation issue and ongoing deficit spending, both direct and via state bank lending, though they too seem to be cutting back some. But until FDI (foreign direct investment) lets up, those ‘flows’ continue to support the yuan.

And commodity currencies are in a class of their own, weakening with weakening commodity prices.

It’s also noteworthy that the deflation is coming at a time when central banks, for all practical purposes, can’t be much more inflationary by (errant) mainstream standards of measurement. Unfortunately, however, it’s not that they are out of bullets, it’s that the presumed lethal live ammo has turned out to be blanks, with mounting evidence that the gun was pointed backwards as well.

The obvious answer is a simple fiscal adjustment- just a few keystrokes on the govt’s computers can immediately restore aggregate demand/employment/output- but they’ve all talked themselves out of that one.

However it’s not total doom and gloom.
For example, the US deficit is large enough to muddle through with decent corporate earnings and a bit of minor ‘job creation’ as well.

And sequentially, GDP is slowly improving: .5 q1, 1.0 q2, and maybe 1-2% for q3.
Good for stocks, not so good for people, but the bar is now set so low and the understanding so skewed that ‘blood in the streets’ isn’t yet even a passing thought, so don’t expect much to change any time soon.

And standby for the ECB writing the next check, no matter how large, to keep that all muddling through as well.

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Mosler bonds get their first plug in the Irish media

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JOBS CRISIS: Will NewERA really get Ireland back to work?

By Philip Pilkington

Sept 12 (Independent) — Last week President Obama announced a new $450bn stimulus program to promote US job growth and help kickstart the economy. Stirrings from within financial community and commentary from Nobel Laurete Paul Krugman – the two most reliable sources on such matters– indicate that this measure isn’t nearly big enough, but its certainly a step in the right direction.

Meanwhile in Ireland, Minister for State Fergus O’ Dowd announced… well, he announced an announcement. In an interview on Thursday he said that an announcement on the status of the NewERA project – which aims to directly create jobs in Ireland – is ‘imminent’.

So how does the cleverly named NewERA (standing for Economic Recovery Act) add up as a stimulus programme?

The project was originally supposed to be of the order of around €4bn but this figure has recently come under scrutiny from the press who say that senior government ministers indicate that it might be ‘watered down’ due to internal government as well as EU/IMF pressure. Even if the €4bn figure pulls through that’s still only around 2.5% of GDP. That’s less than Obama’s latest offering which, as stated above, is probably insufficient for the US – let alone Ireland, which is in far worse shape.

NewERA is set to be funded through two mechanisms. The first is by raising money by selling off state assets. While all the money from ‘privatisation’ was supposed to go toward paying down government debt, wily negotiators convinced the IMF to slip them a bit on the side to go toward this new investment project.

The second revenue stream is borrowed money from the National Pension Reserve Fund – a fund that has become something of a government piggy-bank since the financial crisis hit in 2008.

The key thing to note is that the NewERA project is that it is not a stimulus package in the typical sense of the term. Stimulus packages are usually implemented by governments using fiscal policy — that is, the government’s ability to create and spend money into the economy. In recessions such stimulus is undertaken by governments running budget deficits.

This means that the government spends money without immediately levying taxes on anyone. This is important as it adds new money into the economy rather than simply taking money out and then recycling it back in. We will return to this very important point in a moment, for now let us take a look at the project itself.

The focus of the project is on infrastructure. To say that such a focus on infrastructure is welcome would be a vast understatement.One of the targets is water infrastructure which, to anyone who has had their water cut off during the cold Irish winter, is of obvious importance.

Another is energy – with a focus on clean, renewable energy – which, given the rising energy prices, will be welcomed by everyone. And finally we have a project to improve broadband access across the country — an extremely important prerequisite to having businesses invest in any given location these days.

Such a focus on infrastructure will also ensure that many of the jobs go to laid-off construction workers. This is the perfect demographic to target as when the housing mania went down the drain so too did many construction jobs, giving rise to high unemployment levels among this group.

Another important aspect to the project is that it will get the debate going on fiscal stimulus. It will also ensure that there is an active government organisation in place to lobby for and help initiate stimulus plans in the future.

This really is one of the most important aspects of the project because, small as it currently is, when the world economy starts getting back on track and international leaders start getting their acts together, we will all (hopefully) have learned our lessons from the last financial crisis and will not rely on asset price bubbles to stimulate — or should I say simulate — economic growth.

This means that governments will have to play an increasingly large role in economies in order to ensure sufficient demand without sending households on any more debt binges. Governments will likely not just have to intervene in terms of regulating banking institutions but also through direct investment to ensure that economic growth continues at a reasonable level without demanding massive private sector indebtedness.

The Japanese, for example, who have been suffering for years after a massive housing and stock bubble burst in 1991, have learned this lesson well. The NewERA project will ensure that there is a precedent for powerful, streamlined government-led investment projects that help-out rather than crowd-out private sector activity. Such projects will be key to stabalising all developed economies in coming decades.

The only issue that can really be taken with the NewERA project is how it’s being funded. Selling off state assets during a slump is never a good idea — “No one would sell assets in this environment,” mumbled one minister in a Dail debate on NewERA this year. And dipping into the National Pension Reserve Fund is a bad habit.

However, the government have little choice and, although this will only provide a very short-term stimulus, it is probably one of the single best economic policies to come out of the current Fine Gael/Labour government so far.

But the obstacles currently faced on spending for the NewERA project will become increasingly apparent as time wears on. When we entered the Euro we gave up our ability to issue currency and with it our ability to spend without revenue constraints – now, as in the case of the NewERA project, we essentially have to make do with what we have.

This will become more and more of a burden in the future as the Irish government gradually learn from the Japanese and come to realise that the only realistic way for households to pay down debt is for the government to increase its spending.

If the Europeans continue to ignore this simple but powerful truth and keep calling for austerity, the Irish will have to do something about this themselves. There are a few options on the table in this regard without dropping out of the eurozone. One is the issuance of ‘Mosler bonds’.

These are government bonds backed with the guarantee that should the government default, the bonds will be accepted to extinguish tax liabilities. There is good reason to believe that these would give the Irish government significant fiscal policy space by driving down yields on bonds as they became a ‘sure thing’ for investors (such a plan would also prevent default).

Other options– such as running a parallel currency – will be discussed by major international figures, including former member of the Bank of England’s Monetary Policy Commitee and leading London School of Economics economist Charles Goodhart, at a conference taking place on the 22nd and 23rd of this month at the Mont Clare Hotel in Dublin.

And a good thing too, as even though all the talk is currently focused elsewhere, this will soon become a pressing national policy concern that people will simply not be able to ignore.

More information on the conference can be found at: http://www.feasta.org/debt-conference or contact info@feasta.org..

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SZ News

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Budget surplus, strong currency to the point where it weakens exports if they don’t buy sufficient fx to keep the currency down. Fits the pattern.

Swiss July Consumer Indicator Declines to Lowest in 1 1/2 Years
Aug. 30 (Bloomberg) — A gauge of Swiss consumer demand dropped to the lowest in 1 1/2 years in July, adding to signs the economy is cooling.

The consumption indicator declined to 1.29 from a revised 1.52 in the previous month, Zurich-based UBS AG said in an e-mailed statement today. That’s the lowest since February 2010. It had previously reported a June reading of 1.48.

Switzerland’s Government Expects Budget Surpluses Through 2013
Aug. 30 (Bloomberg) — Switzerland’s government said it expects to post budget surpluses in every year through 2013.

The consolidated surplus for the state, cantons, communities and the country’s social-security system will widen to an estimated 0.8 percent of gross domestic product this year from 0.4 percent in 2010, the government in Bern said in an e-mailed statement today. In 2012 and 2013, the surplus may narrow
to 0.6 percent and 0.5 percent of GDP, respectively.

Public debt under the European Union’s so-called Maastricht criteria will decline to an estimated 36.4 percent of GDP this year from 38.4 percent in 2010, according to the statement. In 2012 and 2013, it is seen decreasing to 35.7 percent and 34.1 percent, respectively.

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Swiss currency issues

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Gnomes need MMT too, even thought they would undoubtedly try to punch holes in it…

Yes, currency intervention works. It’s what I call ‘off budget deficit spending’ and there are no nominal limits.

But seems they haven’t yet figured out that a tax cut and/or spending increase would do the trick all the better re: the currency, domestic demand, and employment.

Swiss Producer & Import Prices Drop Further In July

August 15 (RTTNews) — Switzerland’s producer and import prices decreased at a faster pace in July, data released by the statistical office showed Monday.

The producer and import price index dropped 0.6 percent year-on-year in July, faster than the 0.4 percent decrease recorded in June.

The producer price index decreased 0.8 percent annually during the month, while the import price index fell by 0.1 percent.

On a monthly basis, the producer and import price index decreased 0.7 percent during the month. There was a 0.4 percent monthly decline in producer prices, and a 1.1 percent decrease in import prices during the month.

Swiss Government, SNB in ‘Intense’ Talks, SonntagsZeitung Says

By Simone Meier and Matthias Wabl

August 15 (Bloomberg) — The Swiss government and the central bank are in “intense” talks about a possible franc target to stem currency gains, SonntagsZeitung newspaper reported, citing unidentified people close to the situation.

The plans are “ready” and the Swiss National Bank may set such a target in “coming days,” the newspaper reported yesterday. The discussions are focused on the government’s role and an “appropriate plan” may be adopted on Aug. 17, it said. Walter Meier, a spokesman for the SNB, declined to comment.

SNB policy makers, led by Philipp Hildebrand, have been seeking ways to deter investors from piling into the franc and stop the currency’s ascent to near parity with the euro. While the central bank boosted liquidity in money markets and cut borrowing costs to zero, lawmakers from the People’s Party to the Christian Democrats have signaled their support for tougher measures to protect the economy and avert job losses.

“The SNB is ‘leaning against the hurricane’ in a major way,” Stephen Gallo, head of market analysis at Schneider Foreign Exchange Ltd. in London, said in an e-mailed note today. While the central bank is probably “still looking for a better entry point to initiate a new round” of currency purchases, it “will have a very difficult time limiting the extent of the franc strength.”

The franc traded at 1.1404 versus the euro at 9:45 a.m. in Zurich, down 2.9 percent from Aug. 12. It reached a record of 1.0075 on Aug. 9. Against the dollar, the currency was at 79.74 centimes, down 2.5 percent.

October Vote

Lawmakers, facing elections in October, have become increasingly concerned that the franc’s strength will erode exports and hinder growth. Consumers became more pessimistic about the economic outlook and job prospects in July and investor confidence slumped. The government held an extraordinary meeting on the franc on Aug. 8 and forecast growth to weaken over the coming months.

Goldman Sachs Group Inc. said in an e-mailed note on Aug. 5 that cut its Swiss economic-growth forecasts for this year and next to 1.9 percent from 2.1 percent and to 0.6 percent from 2 percent, respectively.

Christophe Darbellay, head of the Christian Democrats, said in a telephone interview on Aug. 12 that the party supports the SNB and called for “extraordinary measures.” People’s Party Vice President Christoph Blocher, who previously objected to currency purchases, said policy makers need to use all tools to fight a “war.”

Secret Meeting

While the SNB is formally independent, the government may comment on a target to make such a step “as efficient as possible,” the newspaper said. The SNB may introduce an initial lower limit of slightly above 1.10 versus the euro before gradually increasing it, SonntagsZeitung reported, citing insiders.

Swiss Economy Minister Johann Schneider-Ammann led a secret meeting in Bern on Aug. 2 with leaders including Swatch Group AG Chief Executive Officer Nick Hayek and Credit Suisse Group AG Chairman Urs Rohner to discuss the franc, Neue Zuercher Zeitung am Sonntag reported yesterday, without saying where it got the information. The participants all agreed to support the SNB weakening the currency, it said.

Andre Simonazzi, a government spokesman, confirmed that the franc will be on the agenda when the Cabinet meets on Aug. 17 in Bern. The government is in close contact with the SNB and Hildebrand also attended the extraordinary session last week, he said. He wouldn’t comment on possible measures.

‘Several Hundred Billions’

SNB policy makers have been reluctant to start purchasing foreign currencies to weaken the franc after intervention attempts in the 15 months through mid-June 2010 sparked a record loss of $21 billion last year.

Lukas Gaehwiler, head of UBS AG’s Swiss operations, told SonntagsZeitung in an interview that the SNB has “better chances of success” with interventions, given the current exchange rate. Policy makers would have to be ready to spend “several hundred billions of francs or more,” he said.

“The SNB is wary of currency interventions given that they were not very successful the last time,” said Ursina Kubli, an economist at Bank Sarasin in Zurich. Still, “with the franc moving closer to parity, a lot of measures are becoming more realistic.”

Swiss Franc Slides Amid Speculation of Target-Setting; Yen Falls

By Keith Jenkins and Kristine Aquino

August 15 (Bloomberg) — The Swiss franc fell against the euro and headed for its biggest three-day decline since the European currency’s 1999 debut on speculation Switzerland will take further action to counter recent gains.

The franc slid for a fourth day versus the dollar after the SonntagsZeitung newspaper said the Swiss government and the central bank are in “intense” talks over setting a target for their currency. The yen dropped the most in a week against the euro after Japan’s Finance Minister Yoshihiko Noda indicated he’s ready to intervene in foreign-exchange markets again.

“The market is rightly nervous about what’s likely to come from the Swiss authorities as they have a track record of going down more unconventional policy steps,” said Lee Hardman, a currency strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in London. “If the steps will be enough to reverse the Swiss franc’s strengthening trend remains to be seen, but at these levels of overvaluation, which are very extreme, the risk-reward is more favorable in their way.”

The franc tumbled 1.6 percent to 1.12642 per euro at 7:12 a.m. in New York, from 1.10857 on Aug. 12, after rallying to a record 1.00749 on Aug. 9. The Swiss currency has slid 8.7 percent over the past three days, the most in 12 years. The franc declined 1.3 percent to 78.81 centimes per dollar after advancing to a record 70.71 centimes on Aug. 9.

Yen Versus Euro

The yen declined 0.4 percent to 109.78 per euro and depreciated 0.1 percent to 76.79 per dollar after climbing to 76.31 on Aug. 1, approaching its post-World War II record of 76.25 set on March 17. The 17-nation euro increased 0.3 percent to $1.4279.

The franc has soared 12 percent in the past three months and the yen added 3.5 percent, according to Bloomberg Correlation-Weighted Indexes. The currencies have gained as debt crises in Europe and the U.S. boosted demand for safety.

The Swiss National Bank may set a target for the currency in “coming days,” SonntagsZeitung reported. Talks are focusing on the role of the government and an “appropriate plan” may be adopted Aug. 17, the newspaper said.

SNB policy makers, led by Philipp Hildebrand, have been seeking ways to stop the franc’s ascent to almost parity with the euro. While the central bank boosted liquidity in money markets and cut borrowing costs to zero, lawmakers have signaled their support for tougher measures to protect the economy.

‘Shock-and-Awe’

“The market is paying much more respect towards the idea that there’s some sort of shock-and-awe tactic being put together in Switzerland,” said Robert Rennie, chief currency strategist in Sydney at Westpac Banking Corp., Australia’s second-largest lender. “It’s this fear of the unknown that has sparked a significant move” in the franc.

Gains have left the franc 41 percent too strong against the euro, according to an index developed by the Organization for Economic Cooperation and Development in Paris that uses relative costs of goods and services. It’s also the most overvalued currency against the dollar, at 49 percent.

The yen has risen beyond the level that prompted Japan to sell the currency on Aug. 4, its first intervention in foreign-exchange markets since March. A stronger yen reduces the value of overseas income at Japanese companies when converted into their home currency.

“An unstable situation is continuing,” Noda said yesterday during a television talk show on the public broadcaster NHK. “As foreign-exchange market matters are my prerogative, I will continue to closely watch the markets and take bold action if it becomes necessary.”

Japan’s Economy

Japan’s economy shrank at a 1.3 percent annual pace in the three months through June, the third quarter of contraction, government data showed today. The median forecast of economists surveyed by Bloomberg News was for a 2.5 percent drop.

The euro rose for a third day versus the dollar on speculation a meeting tomorrow between French President Nicolas Sarkozy and German Chancellor Angela Merkel in Paris may result in action to contain the region’s debt crisis.

The two leaders “will come out with something,” said Alex Sinton, senior dealer at ANZ National Bank Ltd. in Auckland. “It may even be long-term viable. I suspect there’ll be a range broken this week.” Investors will be looking to sell the euro on rallies toward $1.44, Sinton said.

Foreign-exchange traders reduced bets against the dollar by the most on record as demand for Treasuries soared amid global growth concerns. Aggregate bets the greenback will weaken against the euro, the yen, the Australian, Canadian and New Zealand dollars, the pound, the franc and the Mexican peso plunged by 154,105 contracts to 153,216 in the week ended Aug. 9, the biggest drop ever in Commodity Futures Trading Commission data compiled by Bloomberg beginning in November 2003.

Pound Outlook

Traders are betting on pound weakness even as the euro-area debt crisis deepens because of slumping consumer sentiment and a growth rate that may trail behind Germany’s by more than two percentage points in 2011, analysts in Bloomberg surveys said. Analysts cut forecasts for sterling versus the euro by 5.7 percent this year, the most of 17 developed-nation pairs tracked by Bloomberg.

The pound declined 0.2 percent to 87.66 pence versus the euro today and appreciated 0.2 percent to $1.6306.

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