Euro woes continue as the ECB's three year lending operation fails to alleviate concerns

Tom Tong22/Dec/2011Currency Updates

GBP

Sterling struck an 11-month high against the euro on Wednesday after strong demand at the European Central Bank’s three-year lending operation failed to alleviate concerns about the region’s debt crisis and the fragility of the common currency.

Dovish Bank of England minutes that kept the possibility of more quantitative easing on the table had little market impact, with many market players seeing the UK currency as a relative safe haven from the debt troubles plaguing the euro zone.

BoE policymakers left the door open for an additional injection of cash into the faltering economy in February, judging that the time was not ripe yet for more easing given uncertainty about the euro crisis.

Today the quarterly Current Account figures will be released, giving insight into the difference between imports and exports. It is forecast at -5.6B a sharp drop from last quarter.

EUR

The single currency is aiming higher in the early European morning, operating firmly above de 1.3050 key level after trading in a very narrow range during the Asian session.

The euro rallied after yesterday’s successful 36m LTRO, hitting almost 1.32, but the rally proved to be short-lived as investors have taken profits immediately, dragging the bloc currency back to the 1.31 zone. The euro’s fall against most major currencies on Wednesday came as the European Central Bank announced that it would unleash $641bn in three-year loans to 523 banks across Europe. The ECB’s hefty injection of cash was a surprise to the markets on Wednesday and is also the biggest amount ever provided by the central bank in a single operation. The loan programme, known as longer-term refinancing operations, (LTROs) is equivalent to around 5% of euro zone gross domestic product.

USD

The exceptional volatility for the Dollar and capital markets over the previous 24 hours should have surprised no one. Anticipation of the European Central Bank’s pseudo-stimulus program fed into the market’s insatiable appetite for speculative rallies derived from government intervention. Despite the exceptional market reaction to the news of a massive infusion of liquidity for the European banking system, we note that the S&P 500 Index (our benchmark for risk appetite) was surprisingly light. Without the necessary market depth to mount a full run, we may have seen the market’s last and best potential opportunity to make a year-end drive pass us by.

We expect uncertainty about what’s next for the Eurozone will prompt gains for the US dollar today, with the dollar index moving higher. Concerns about the Eurozone once again dominate, and the US Dollar is moving higher as a result.

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Written by Tom Tong

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