Bloomberg News

Euro Rallies After ECB Liquidity Plan Damps Debt Crisis Concern

September 15, 2011

Sept. 15 (Bloomberg) -- The euro rose against the dollar the most in a month after the European Central Bank said it will lend dollars to euro-area banks, damping liquidity concern related to the region’s sovereign debt crisis.

The 17-nation currency rallied as the ECB said it will coordinate with the Federal Reserve and other central banks to offer three separate three-month loans to ensure euro-area banks have enough of the U.S. currency through the end of the year. The dollar dropped after weaker-than-forecast economic reports damped confidence in the recovery.

“The euro has come an exceptionally long way, it’s fallen a lot in a short period, it had to find a stable level at some point,” said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. “Lots of little things have come together to support the euro.”

The euro rose 0.9 percent to $1.3877 at 5 p.m. in New York, after gaining as much as 1.3 percent, the most since Aug. 15. The dollar strengthened as much as 0.9 percent against the yen before trading at 76.70.

The Dollar Index, which IntercontinentalExchange Inc. uses to tracks the greenback against the currencies of six major U.S. trading partners, declined 0.7 percent to 76.290.

The Standard & Poor’s 500 Index rose 1.7 percent.

Swaps React

The premium European banks pay to borrow in dollars through the swaps markets decreased after the ECB lending announcement. The cost of converting euro-based payments into dollars, as measured by the three-month cross-currency basis swap, fell 5.28 basis points to 93.13 basis points below the euro interbank offered rate, or Euribor, in London, indicating a lower premium to buy the greenback, according to data compiled by Bloomberg.

“It’s an attempt by the central banks to make sure there’s enough liquidity so the markets don’t freeze,” said Carl Forcheski, a director on the corporate currency sales desk at Societe Generale SA in New York.

The euro has dropped 3.4 percent so far this month as investor skittishness about the spread of the debt crisis has raised banks’ funding costs and roiled markets worldwide.

The ECB’s plan to lend dollars to banks doesn’t solve the underlying problem, said John Taylor, founder and chief executive officer of FX Concepts LLC in New York.

Policy Signals

Policy makers need to coordinate continually, he said today at the Bloomberg Markets 50 Summit in New York. “They don’t act until they act or else,” he said.

French President Nicolas Sarkozy and German Chancellor Angela Merkel said yesterday they are “convinced” Greece will stay in the currency union.

Sarkozy and Merkel signaled they’re ready to keep supporting Greece following a telephone discussion with Greek Prime Minister George Papandreou. Papandreou committed to meet deficit-reduction targets demanded as a condition for further bailouts, according to the statements distributed by the governments in Athens, Berlin and Paris.

“It could help to calm markets, but to be honest it doesn’t really resolve the problem,” said Lauren Rosborough, a senior strategist at Westpac Banking Corp. in London. “There are a lot of people who aren’t convinced Greece is going to stay as part of the euro zone. Risks to the euro still remain.”

Spanish Bonds

The euro rose earlier after Spain sold 3.95 billion euros of bonds due in 2019 and 2020, compared with a maximum target of 4 billion euros. The debt due in October 2020 was sold to yield an average 5.156 percent, compared with 5.2 percent when it was last auctioned on Feb. 17. France sold debt maturing in 2013, 2014 and 2016, as well as inflation-linked securities.

The franc declined for a third day against the euro after the Swiss National Bank said it’s ready to take “further measures” if needed to stem gains in the currency and left its benchmark rate at zero to ward off the threat of a recession.

The central bank last week imposed a franc ceiling of 1.20 against the euro. The SNB also reiterated today it will defend the level with “utmost determination.”

The franc fell 0.1 percent to 1.20646 per euro. It gained 0.8 percent to 86.94 centimes per dollar.

Norway, Sweden

Norway’s krone and Sweden’s krona gained the most among the major currencies. The krone advanced 1.5 percent to 5.5675 per dollar and Sweden’s currency rose 1.7 percent to 6.5821.

“The Scandinavian currencies are strong on their own fundamentals, but they’re also very reliant on strength in Europe,” said Fabian Eliasson, head of U.S. currency sales at Mizuho Financial Group Inc. in New York. “All eyes are on Europe at this point.”

New Zealand’s dollar earlier fell against its U.S. counterpart after the Reserve Bank held its official cash rate at 2.5 percent and signaled no urgency to raise borrowing costs until the global recovery strengthens.

The kiwi dropped as much as 1.4 percent before trading at 82.38 U.S. cents.

The Fed Bank of Philadelphia’s general economic index rose to minus 17.5 in September from minus 30.7 the prior month.

Other reports today showed more Americans than projected filed claims for jobless benefits, consumer prices rose more than forecast and New York-area manufacturing contracted more than estimated.

The dollar rose against the yen as the consumer-price index increased 0.4 percent after a 0.5 percent gain in July, figures from the Labor Department showed today in Washington. Economists projected a 0.2 percent gain, according to the median forecast in a Bloomberg News survey.

--Editors: Paul Cox, Dennis Fitzgerald

To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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