Euro Rises After European Central Bank Extends Loans, Bond Buys

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October 06, 2011, 3:49 PM EDT By Catarina Saraiva and Keith Jenkins

Oct. 6 (Bloomberg) -- The euro strengthened against the dollar and yen on speculation a reintroduction of loans to banks by the European Central Bank will buoy crisis-ridden markets.

The 17-nation currency weakened earlier as ECB President Jean-Claude Trichet said the region’s economy is facing “intensified downside risks.” The pound fell after the Bank of England unexpectedly expanded its bond-purchase plan. Brazil’s real surged after inflation rose more than forecast, raising bets the central bank may slow the pace of interest-rate cuts.

“What the ECB did today, plus talk of more support for banks, is inducing some short covering,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman & Co. in New York. “It’s a bit of a relief rally.” A short is a bet the price of an asset will fall.

The euro rose 0.4 percent to 102.90 yen at 3:23 p.m. in New York after dropping to 100.76 on Oct. 4, the weakest level since June 2001. The currency slid as much as 0.8 percent against the dollar before trading 0.6 percent higher at $1.3429. It dropped to $1.3146 on Oct. 4, the lowest since Jan. 13. The yen gained 0.2 percent 76.63 per dollar.

Sterling declined 0.2 percent to $1.5434, and weakened 0.8 percent to 87 pence per euro.

ECB Decision

ECB officials left their benchmark rate at 1.5 percent, as predicted by 41 of 52 economists in a Bloomberg News survey.

Trichet, announcing a policy decision for the final time, said the ECB will resume covered-bond purchases and reintroduce year-long loans for banks as the sovereign-debt crisis threatens to freeze money markets. Trichet will step down at the end of the month and be succeeded by Italy’s Mario Draghi.

“The markets are a bit relieved that they’re getting some support rather than no support from the ECB in the form of liquidity measures,” said Kathy Lien, director of currency research at this online trading firm GFT Forex in New York.

Futures traders increased bets the euro would fall versus the dollar to net 82,473 contracts in the week ended Sept. 27, the most since June 2010, according to Commodity Futures Trading Commission data.

Sterling tumbled after U.K. policy makers said they would increase their bond-purchase program by 75 billion pounds ($115 billion) The median forecast of economists surveyed by Bloomberg News was for no change.

The main rate was maintained at 0.5 percent, as predicted by all 53 economists in a separate survey.

Recovery Threatened

The central bank, which expects to complete the round of purchases in four months, said in a statement that slowing global growth and the turmoil in Europe “threaten the U.K. recovery.” It also said it’s “more likely” that inflation will undershoot its 2 percent goal in the medium term.

Currencies of higher-yielding countries rose after the Standard & Poor’s 500 Index added 0.9 percent after earlier losing as much as 0.8 percent.

“There’s a shift in risk sentiment,” said Niall O’Connor, a technical analyst at JPMorgan Chase & Co. in New York. “There’s potential for risk to improve and the dollar to weaken.”

Australia’s dollar added 0.9 percent to 97.42 U.S. cents and New Zealand’s currency advanced 0.6 percent to 77.07 cents.

Brazil’s real rose the most among the major currencies, adding 2.6 percent to 1.7860 per dollar. The IGP-DI inflation index showed prices rose 0.75 percent in September, compared with a 0.61 percent increase in August, according to a report from the Rio de Janeiro-based Getulio Vargas Foundation. Economists had forecast a 0.65 percent increase, according to a Bloomberg survey.

The nation’s central bank cut its benchmark interest rate in August to 12 percent from 12.5 percent, citing a “substantial deterioration” in the global economy.

Franc Falls

The franc dropped for a third day against the euro on speculation the central bank will impose further measures to contain its strength after imposing the cap last month at 1.20 per euro. Reserves jumped to 282.4 billion francs ($306 billion) at the end of September, from 253.4 billion francs the previous month, the SNB said.

The franc dropped 0.4 percent to 1.2373 per euro.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, fell 0.5 percent to 78.620 as stocks reversed earlier losses.

--Editor: Paul Cox, Dennis Fitzgerald

Dave Liedtka at dliedtka@bloomberg.net

To contact the reporters on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net

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