By Ben Levisohn and Inyoung Hwang
March 2 (Bloomberg) -- The euro rose from its lowest level against the dollar since May after the Greek government said it will announce new deficit cuts tomorrow, increasing speculation that a solution to its debt crisis may be nearing.
The Canadian dollar surged after the nation’s central bank said inflation and economic output have been higher than policy makers expected. The euro appreciated against the pound for a fifth consecutive day as Greek bonds advanced after Prime Minister George Papandreou told his party’s parliamentarians that “painful” decisions are coming.
“The talk that Greece will announce new deficit cuts is giving market fundamental reason to rally euro,” said Kathy Lien, director of currency research, with online currency trader GFT Forex, in New York. “Any hint of a bailout or new deficit cuts is enough to push it higher.”
The euro gained 0.3 percent to $1.3606 at 4:10 p.m. in New York. It earlier fell as much as 0.9 percent to $1.3436, the lowest level since May. It gained 0.5 percent against the pound, to 90.95, and traded at 120.75 yen.
Euro-dollar “made a marginal new low this morning and has so far not sustained the move,” Citigroup Inc. technical analysts led by Tom Fitzpatrick in New York wrote in a report today. “The failure to sustain the move to a new trend low this morning is beginning to suggest a turn back up is the risk as was the case at the start of March 2009.”
The Greek government will announce as much as 4.8 billion euros ($6.5 billion) of additional deficit cuts tomorrow ahead of a March 16 deadline, bowing to pressure from the European Union and investors to do more to tame the region’s biggest shortfall, a person familiar with the plan said.
The new measures will include higher tobacco, alcohol and sales taxes and deeper cuts in public workers’ bonus payments, said the person, who declined to be identified because the details aren’t public.
“The news has provided some support for the euro,” said Meg Browne, a vice president of foreign exchange research in New York at Brown Brothers Harriman & Co. “The mid-March deadline for Greece will be calming for the markets. We could get a correction to $1.38-$1.40.”
The announcement would come two days before Papandreou meets Germany’s Angela Merkel and may help the chancellor justify aiding Greece to taxpayers and political opponents who say the country shouldn’t be bailed out after living beyond its means.
“The government is forced to ask all Greeks to contribute,” Papandreou said in Athens. “Now we need the support of our [European] partners. To provide it they must convince their citizens, from whom they are also asking for sacrifices, that the Greeks are doing what must be done.”
The euro strengthened as credit-default swaps linked to Greek government bonds tumbled 31.5 basis points to 313 basis points, the lowest since Jan. 18, according to CMA Datavision prices.
“Greek CDS have come in sharply,” said Alan Ruskin, head of international currency strategy in North America at Royal Bank of Scotland Group Plc in Stamford, Connecticut. “The Greeks and the core countries like Germany and France will reach an agreement and that will likely place a floor on the euro- dollar.”
The Canadian dollar gained 0.8 percent to C$1.0333 against the greenback as the Bank of Canada signaled rate increases in coming months. The target rate for overnight loans between commercial banks remained at 0.25 percent at today’s meeting, where it’s been since April, as predicted by all 22 economists surveyed by Bloomberg.
“Core inflation has been slightly firmer than projected, the result of both transitory factors and the higher level of economic activity,” the Ottawa-based bank said in a statement. Fourth quarter growth came from “vigorous domestic spending and further recovery in exports.”
The pound fell for a sixth day versus the dollar, its longest run of declines in more than 16 months, amid concern Britons may fail to elect a government with a large enough majority to cut the country’s deficit.
Sterling yesterday had its biggest drop against the dollar since Oct. 23, based on closing prices, as a Feb. 28 YouGov Plc poll showed the Conservative lead narrowed to two percentage points. That suggested Prime Minister Gordon Brown’s Labour Party would still win the largest number of seats and retain power given the way both parties’ voters are distributed.
The Tory lead was five points in the poll published late yesterday by ComRes Ltd. Elections must be held by June.
“The fiscal fears are shifting from Europe to the U.K.,” said Sebastien Galy, a currency strategist at BNP Paribas SA in New York. “There is a higher probability that Labor may win and that means they may try to cheapen themselves out of the problem.”
Sterling has fallen 5.9 percent this year, the worst performance among the Group of 10, according to the Bloomberg Correlation-Weighted Currency Indices. The pound dropped 0.3 percent today, according to the index, the second-worst after New Zealand’s dollar.