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Euro Climbs on ECB Skepticism as SNB Fallout Dents Dollar, Franc

The euro advanced the most in more than a month against the dollar amid speculation any additional stimulus measures announced by the European Central Bank at its policy meeting will fall short of analyst forecasts.

The greenback also declined amid speculation traders, hurt by the Swiss National Bank’s decision to remove its trading limit against the shared currency, are paring the market risk they are prepared to take. The Swiss franc dropped at least 1.1 percent against all 16 of its major peers, trimming its surge in the wake of the central bank’s removal of the 1.20-per-euro floor. The Danish central bank said it wouldn’t follow Switzerland abandoning its currency peg after it cut interest rates today. ECB policy makers will meet on Jan. 22 to discuss introducing new stimulus, including quantitative easing.

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There are “some signs of short covering prior to the ECB on Thursday,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. in London, referring to the unwinding of bets the euro will weaken. “My sense is some players believe a lot, if not all, of the QE announcements are priced in. The ECB may disappoint in terms of size.”

The euro gained as much as 0.6 percent to $ 1.1639, the biggest jump since Dec. 16. It fell to $ 1.1460 on Jan. 16, the weakest level since November 2003, and was the worst performer among the dollar’s 16 major peers in the week through Jan. 16. It traded at $ 1.1609, up 0.4 percent, at 2.48 p.m. in New York.

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The shared currency rose 0.5 percent to 136.61 yen after touching 134.71 on Jan. 16, the least since Oct. 16. It jumped 2.6 percent to 1.02028 Swiss francs after plunging 17 percent last week to close at 99.41 centimes.

The krone was little changed at 7.4330 per euro after the Danish bank cut its deposit rate to minus 0.2 percent, matching a record low, from minus 0.05 percent and lowered its lending rate to a record 0.05 percent from 0.2 percent. Based on closing prices, it traded at the strongest since 2004 before the cut.

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QE Package

“We have the necessary tools to defend the peg,” Karsten Biltoft, head of communications at the Copenhagen-based central bank, said by phone. Asked whether Denmark could ever consider abandoning its currency peg, he said, “Of course not.”

ECB President Mario Draghi will announce a 550 billion-euro bond-purchase program this week, according to 93 percent of respondents in a Bloomberg News survey of economists. That tops the 500 billion euros in models presented to ECB officials this month.

“Market expectations now are stellar,” said Attilio Bertini, head of research at Credito Valtellinese SC in Sondrio, Italy. There must be “no disappointment.”

Citigroup Inc., Deutsche Bank AG and Barclays Plc, the three biggest currency traders in a Euromoney survey, lost money when the SNB scrapped the euro cap on Jan. 15, according to people with knowledge of the companies, who asked not to be identified because the figures haven’t been made public. Retail foreign-exchange traders from New Zealand to New York also said they were hurt by the currency’s moves.

Dollar Bulls

Data from the Commodity Futures Trading Commission shows that in the week ending Jan. 13, hedge funds and other speculators were the most bullish on the dollar against the euro since November and the most bullish on the currency against the pound since September 2013.

“The theme we are seeing is one of general risk reduction,” said Michael Sneyd, a currency strategist at BNP Paribas SA in London. “Investors generally lost money when the floor went. As a response we are seeing investors generally reducing risk in the FX market. Bullish dollar is the most prevalent theme, so as people reduce exposure it’s long-dollar trades, which are trimmed back the most.”

The greenback rose 0.2 percent to 117.69 yen. U.S. financial markets are shut for a public holiday.

A key level for the dollar is 118 yen, which is the strike price for expiring options contracts this week with a combined notional value of $ 3.3 billion, according to Tamara Henderson, an economist at Bloomberg LP in Singapore. Other currencies trading near strikes on large options contracts against the greenback expiring this week include the euro, Australian dollar and yuan, Henderson wrote in research.

To contact the reporter on this story: David Goodman in London at [email protected]

To contact the editors responsible for this story: Paul Dobson at [email protected] Cecile Gutscher

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