ECONOMY

Euro rallies, ECB tender seen boosting confidence

The euro rose on Wednesday on speculation many eurozone banks would apply for cheap loans offered by the European Central Bank, which may improve risk demand if it is seen to help lenders boost their finances and ease pressure on indebted European states.

The ECB launches its first ever offer of unlimited, ultra-cheap three-year funding to banks later in the day to help them lower their funding costs. Investors hope the tender will tempt banks to buy Italian and Spanish debt and pull yields lower.

A Reuters poll shows euro zone banks will tap around 310 billion euros at the tender, while some analysts expect the central bank may allot even more funding.

Further signs that Europe’s funding crisis is easing would be positive for the euro, but some analysts said that making more loans available to struggling banks would ultimately do little to solve the euro zone debt crisis.

Some argued that overall market sentiment for the single currency would remain negative.

The euro rose 0.6 percent on the day to a session high of $1.3155, and some analysts expected a big take up at the tender could push the euro higher to target levels around $1.3170 or even $1.3225, particularly if stock markets rally.

“It’s possible we might see these levels today, as the ECB auction may give back more confidence to the market,» said Antje Praefcke, currency strategist at Commerzbank in Frankfurt.

But she added: «The euro’s problems are not going to fade just because of the year-end, and I wouldn’t go into the new year and buy the euro strongly.”

Sources reported more than 10 Italian banks, including major lenders, were looking to apply for the loans by using state-guaranteed bonds as collateral, with talk they could tap as much as 70 billion euros, or around 15 percent of the total.

Gains in the euro pushed the dollar 0.5 percent lower versus a currency basket to 79.504, pulling further away from an 11-month high hit last week. Against the yen, the dollar slipped 0.2 percent to 77.72 yen.

Market participants were focused on how the euro would react after the tender, and some analysts expected that big gains in the euro would be limited as many investors were interested in selling the single currency if it rises.

“Traders are cautious on the upside and favor a sell-on-rallies approach,» Citi analysts said in a CitiFX Wire note.

“Only a daily close above $1.3132 would prompt them to reassess.”

Despite its gains versus the dollar, the euro hit an all-time low against the Australian dollar as improving risk appetite increased the appeal of commodity-linked currencies.

The Australian and New Zealand dollars each rose around 1 percent versus the US currency.

The euro was flat at 1.2188 Swiss francs, but remained on the back foot as the Swissie has been gaining strength since last week when the Swiss National Bank kept the euro/swiss floor unchanged.

This disappointed some speculators who had bet on a rise to 1.2500 francs. [Reuters]