DEBT FINANCING. Euro Strengthens on ECB Lending Offer, Merkel, Sarkozy Backing

Sept. 17 (Bloomberg) -- The euro rose against the dollar for the first time in three weeks after the European Central Bank said it will lend dollars to euro-area banks, tempering liquidity concern amid the region’s sovereign debt crisis.
The 17-nation currency pared its five-day gain yesterday as finance ministers from euro-zone nations meeting in Poland failed to inspire confidence in measures to control debt problems. Canada’s dollar rose against all of its most-traded counterparts on speculation the nation’s fiscal condition will attract investors during market turmoil. The Dollar Index fell before a Federal Reserve meeting next week where officials may announce further economic stimulus.
“The swap agreement between the ECB and other central banks helped to alleviate some concerns about funding at European banks, that’s been a positive,” said Omer Esiner, chief market analyst in Washington at Commonwealth Foreign Exchange Inc., a currency brokerage. ‘The finance ministers’ meeting has been a little bit of a disappointment and that’s weighting on the euro.”
The euro strengthened 1 percent to $1.3796, from $1.3656 Sept. 9. It reached a seven-month low of $1.3495 Sept. 12. The shared currency was little changed at 105.95 yen. The dollar dropped 1 percent to 76.80 per yen, from 77.61.
The Dollar Index, which measures the greenback against the currencies of six major U.S. trading partners, weakened 0.8 percent to 76.547, from 77.192 last week.
Bank Lending
The euro rose the most in a month Sept. 15 after the ECB said it will coordinate with Fed 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 common currency gained earlier this week after French President Nicolas Sarkozy and German Chancellor Angela Merkel said Greece should remain in the union and Greece reaffirmed commitment to its budget plan.
The euro pared gains yesterday as European finance ministers meeting in Wroclaw, Poland, ruled out efforts to prop up the region’s economy and raised issues of collateral demanded to take part in another Greek bailout.
Futures traders increased bets that the euro will fall against the dollar to the most in more than a year.
The difference in the number of wagers by hedge funds and other large speculators on a decline in the euro compared with those on a gain -- the so-called net shorts -- was 54,459 on Sept. 13, the most since July 2010, according to the Commodity Futures Trading Commission.
Risk Trades
“Risk aversion and the euro is reacting to the continuing disagreements among the euro area on what needs to be done and these appear to be quite large,” said Aroop Chatterjee, a currency strategist in New York at Barclays Plc. “It’s all incremental at this stage and there does not seem to be a credible silver bullet out there.”
The yen rose toward a post-World War II high against the dollar as demand for refuge increased and as the Swiss National Bank-imposed ceiling on the franc leaves Japan’s currency as one of the few haven assets.
The yen reached 76.56 per dollar Sept. 15, within 1 yen of 75.95, the record-high reached Aug. 19.
Bank of Japan board member Ryuzo Miyao said the central bank is ready to take “appropriate” action as needed to support the economy amid worries that the yen will stay strong.
‘Taking Root’
“An area of concern is that the strong yen is taking root,” Miyao said Sept. 14. If the dollar and euro remain weak against the yen on sovereign-debt worries, “concern about the hollowing-out of domestic industries will increase,” he said.
Japan last intervened in the currency market, selling yen to try to curb its climb, on Aug. 4, when it touched 76.97 to the dollar.
The Swiss National Bank last week imposed a ceiling on the franc at 1.20 per euro, the first time such a limit was set since 1978, in an effort to protect the nation’s exporters. The franc had rallied 13 percent against the single currency this year before the ceiling was announced.
The franc was little changed this week against the euro at 1.2086. It rose 0.9 percent to 87.56 centimes per dollar.
Canada’s dollar strengthened for the first week in three versus the greenback, rising along with the yen and franc, as investors sought haven assets to protect from euro zone problems. Canada has a smaller budget-deficit ratio, lower jobless rate and faster growth than most of its Group of Seven peers.
Loonie Strength
The loonie, as Canada’s dollar is known for the image of the aquatic bird on the C$1 coin, rose 1.9 percent to 97.81 cents per U.S. dollar, from 99.67.
The British pound fell for a fourth week against the dollar on speculation a deteriorating economic outlook will spur the Bank of England to introduce additional monetary stimulus. The pound dropped 0.6 percent to $1.5791, from $1.5883 last week.
The dollar fell as reports showed a stagnant U.S. economy. U.S. retail sales were unchanged in August, following a 0.3 percent gain for July that was smaller than previously estimated, Commerce Department figures showed.
Other reports 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 whole question is whether the Fed is going to introduce another round of quantitative easing, whether that is going to kill the dollar,” said Kathy Lien, director of currency research with online trading firm GFT Forex in New York.
The Federal Open Market Committee may decide to replace holdings of shorter-term Treasuries with longer maturities at its two-day policy meeting starting Sept. 20 in an effort to keep borrowing costs low and support the economy.
--With assistance from Chris Fournier in Halifax, Nova Scotia. Editors: Paul Cox, Dave Liedtka
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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