Bloomberg News

Euro Strengthens as Six Central Banks Ease Funding; Yen Weakens

November 30, 2011

Nov. 30 (Bloomberg) -- The euro gained the most in a month against the dollar after the Federal Reserve and five other central banks acted to make more funds available to lenders as Europe’s debt crisis threatens global economic growth.

The dollar fell versus all of its 16 most-traded peers and the yen declined against most as investors sought higher- yielding assets. China lowered reserve requirements for banks earlier for the first time since 2008. South Africa’s rand and Australia’s dollar climbed.

“It’s been a major risk-positive move,” said Alan Ruskin, global head of Group-of-10 foreign-exchange strategy at Deutsche Bank AG in New York. “This addresses the funding issue, but if this was it, the market would become disillusioned quite quickly again. There’s going to need to be follow-up of a more substantial order.”

The euro strengthened 1 percent to $1.3446 at 5 p.m. in New York and reached $1.3533, the strongest level since Nov. 22. It fell 3 percent this month after gaining 3.5 percent in October, and was headed for a 2011 gain of 0.4 percent. The yen fell 0.6 percent to 104.37 per euro. The Japanese currency rose 0.4 percent to 77.62 per dollar, extending its November gain to 0.7 percent. It was poised for a 4.5 percent advance this year.

Europe’s 17-nation currency gained as much as 1.6 percent today, the biggest intraday jump since Oct. 27, when European leaders agreed to expand their rescue fund and reached an accord with lenders on 50 percent writedowns for Greek debt.

Dollar Swap Lines

The premium banks pay to borrow dollars overnight from central banks will fall by half a percentage point to 50 basis points, the Fed said today in a statement. The so-called dollar swap lines will be extended by six months to Feb. 1, 2013. The Fed coordinated the move with the European Central Bank and the central banks of Canada, Switzerland, Japan and the U.K.

The six central banks also agreed to create temporary bilateral swap programs so funding can be provided in any of the currencies “should market conditions so warrant.” Those swap lines were also authorized through Feb. 1, 2013.

The cost for European banks to fund in dollars fell for the first time in six days. The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, fell to 1.31 percentage points below the euro interbank offer rate. It touched 1.63 percentage points earlier, the most expensive on an intraday basis since October 2008.

“It doesn’t solve all of the euro zone’s problems, but it reduces some of the financial-system concern,” Greg Anderson, a currency strategist at Citigroup Inc. in New York, said of the banks’ action.

Finance Ministers

European Union finance ministers agreed today in Brussels on measures to coordinate national guarantees for banks’ debt issuance. There will be “maximum comparability” between the national programs, which will have to satisfy EU state-aid rules to be published tomorrow, Polish Finance Minister Jacek Rostowski said after a meeting.

Europe’s shared currency weakened earlier after euro-area finance ministers conceded yesterday that efforts to expand their bailout fund missed the target. They agreed at a meeting to work on boosting the resources of the International Monetary Fund so it can “cooperate more closely” with the European Financial Stability Facility, Luxembourg’s Jean-Claude Juncker told reporters.

The euro declined 1.3 percent over the past three months against nine developed-nation counterparts tracked by Bloomberg Correlation-Weighted Currency Indexes. The dollar gained 6.4 percent, and the yen appreciated 3.4 percent.

China’s Move

The dollar and yen slid earlier today as China, in a move to encourage growth, cut the amount of cash banks must set aside as reserves, damping demand for safer assets. The People’s Bank of China said reserve ratios will decline by 50 basis points effective Dec. 5. That may add 350 billion yuan ($55 billion) to the nation’s financial system, according to UBS AG.

Stocks climbed, with the Standard & Poor’s 500 Index surging 4.3 percent.

South Africa’s rand and Australia’s dollar were the biggest winners against the greenback among major currencies. The rand gained 2.9 percent to 8.1089, and the Aussie advanced 2.8 percent to $1.0283.

Canada’s dollar rose after the nation’s economy grew at a 3.5 percent annualized pace in the third quarter, beating the 3 percent expansion forecast in a Bloomberg News survey. It strengthened 1.4 percent to C$1.0174.

Dollar Index

The Dollar Index dropped 0.9 percent to 78.373. It remained lower after an ADP Employer Services report showed U.S. companies added 206,000 workers to payrolls in November, more than the 130,000 gain forecast in a Bloomberg survey. The Chicago Purchasing Managers Index for November and pending home sales in October also increased more than forecast.

The Fed’s Beige Book survey released today said the U.S. economy expanded at a “moderate” pace in 11 of 12 districts, led by gains in manufacturing and consumer spending. The report covers October and the first half of November. It reinforces the central bank’s view that the economy, while strong enough to skirt a recession, remains too weak to bring down a jobless rate stuck near 9 percent or higher for more than two years.

Japan sold 9.09 trillion yen ($116.5 billion) in the foreign-exchange market from Oct. 28 to Nov. 28, the Ministry of Finance said on its website today.

The intervention to stem yen gains was the biggest on a monthly basis, surpassing the sale of 4.51 trillion yen in August, according to ministry data dating to 1991. The yen rose to a post-World War II record of 75.35 per dollar on Oct. 31.

--With assistance from Emma Charlton in London. Editors: Greg Storey, Paul Cox

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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