March 03, 2012

Euro Declines After ECB Approves Record Loans; Dollar Gains Versus Yen

The euro fell against most of its major counterparts after a liquidity injection by the European Central Bank failed to convince investors that the region’s crisis is abating.


The 17-nation currency weakened this week as 800 financial institutions borrowed a record amount of three-year loans from the ECB, which is expected to leave its benchmark interest rate unchanged March 8.

The dollar rose to a nine-month high versus the yen after Federal Reserve Chairman Ben S. Bernanke cast doubt on a third round of asset purchases. Canada’s dollar and Mexico’s peso rallied as oil surged to a 10-month high.

“The euro is now more vulnerable to selling against some of the higher-yielding currencies,” said Omer Esiner, chief market analyst in Washington at the currency brokerage Commonwealth Foreign Exchange Inc.

“Bernanke didn’t comment much about policy easing and that’s been interpreted as a subtle sign that continued improvement in the data may prompt the Fed to adopt a more neutral policy stance. That would be good for the dollar.”

The euro dropped 1.9 percent to $1.3198 and reached $1.3187 yesterday, matching a low from Feb. 21.

The shared currency lost 1.1 percent to 107.97 yen after Feb. 27 touching 109.93, the highest since Oct. 31. The dollar strengthened 0.8 percent to 81.81 yen, rising for a fourth straight week in its longest such stretch since November 2010.

Canada’s dollar and Mexico’s peso were boosted as the nations’ largest export, crude oil, rallied. Oil for April delivery reached $110.55 a barrel March 1, the highest level since May.

Manufacturing Expands

The Canadian dollar advanced 1 percent to 83.97 cents per U.S. dollar and the Mexican peso appreciated 1.1 percent to 12.7599 against the greenback, the biggest gainer among the 16 major currencies tracked by Bloomberg.

South Africa’s rand and the Australian dollar rallied after reports showed manufacturing from China to the U.S. expanded in February, increasing speculation that global growth is on the mend.

South Africa’s rand strengthened 1 percent to 7.5208 per dollar. The Aussie added 0.4 percent to $1.0733.

China’s purchasing managers’ index rose for a third month in February, increasing to 51 from 50.5 in January, the statistics bureau and logistics federation said this week.

The Institute for Supply Management’s U.S. factory index fell to 52.4 in February from 54.1 in the prior month, the Tempe, Arizona-based group’s data showed March 1. Readings above 50 signal growth.
‘Sugar Rush’

The ECB on Feb. 29 awarded 529.5 billion euros ($705 billion) in a second round of three-year loans to banks, increasing the supply of euros in the market.

The euro weakened 3.6 percent in December, during which the central bank held its first three-year refinancing operation, lending 489 billion euros to 523 banks.

“Markets have pulled back after the sugar rush we’ve had from the second longer-term refinancing operation,” Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London, said in a radio interview on “Bloomberg Surveillance” with Tom Keene.

“There is still a great deal of uncertainty, which has been highlighted by the market as we start to see the euro under pressure again.”

German Retail Sales

Germany’s statistics bureau said retail sales adjusted for inflation and seasonal swings fell 1.6 percent in January.


Euro- area retail sales dropped for a third month in January, the European Union’s statistics office will say on March 5, another Bloomberg survey showed.

The ECB will keep its benchmark interest rate at a record low 1 percent on March 8, according to a separate survey.

Intercontinental Exchange Inc.’s Dollar Index (DXY), used to track the greenback against the currencies of six major U.S. trading partners, gained 1.3 percent to 79.449.

The increase is the biggest since the five days ended Dec. 16 and came after Bernanke’s comments in a Congressional testimony damped speculation the Fed will introduce another round of asset purchases.

“We have seen some positive developments in the labor market,” Bernanke said in prepared testimony to the House Financial Services Committee in Washington. He said keeping monetary stimulus is warranted even as the unemployment rate falls.

The Fed has bought $2.3 trillion of bonds in two rounds of so-called quantitative easing from December 2008 until June 2011.

Central bank officials at their January meeting were keeping open the option of a third round of bond purchases in case the economy weakens or inflation falls too low.

‘Highly Accommodative’

The central bank has kept its benchmark interest rate between zero and 0.25 percent since 2008.

“Bernanke described policy as highly accommodative,” Jane Foley, a senior currency strategist at Rabobank International in London, wrote in an e-mailed report yesterday. The dollar, she wrote, “is benefiting on speculation that the Fed may not proceed with additional QE.”

U.S. employers added 210,000 jobs in February, according to the median estimate of 55 economists in a Bloomberg News survey before the Labor Department’s report March 9. The unemployment rate dropped to a three-year low of 8.3 percent in January.

Brazil’s real fell by the most since Dec. 16 after the nation extended a foreign investment tax this week to try and curb the currency’s strength.

Brazil said the 6 percent tax, which has been extended to foreign loans and bonds that mature in three years or less, takes effect immediately in a government effort to stem a 7.9 percent gain this year in the currency.

The tax was previously applied to foreign borrowing of as long as two years.

The real weakened 1.2 percent to 1.7304 per dollar after reaching 1.6890 Feb. 29, the strongest level since Oct. 31.

bloomberg.com

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