Euro Rises on View ECB Not Aggressive Enough to Debase Currency

By Anchalee Worrachate and Ye Xie

May 7 (Bloomberg) -- The euro climbed to a one-month high against the dollar as traders said the European Central Bank’s plan to buy 60 billion euro ($80.5 billion) in covered bonds isn’t aggressive enough to debase the currency


Sterling dropped from a four-month high versus the dollar after the Bank of England said it will raise bond purchases by 50 billion pounds ($75 billion) to give the British economy additional support. The ECB joins the Federal Reserve, the Bank of Japan and the Bank England in buying bonds to spur growth.
“The amount committed, around 60 billion euros, is quite small, and the plan is rather vague at this point,” said David Woo, global head of currency strategy in London at Barclays Plc. “Some in the market had expected more.”


The euro climbed 0.4 percent to $1.3390 at 11:15 a.m. in New York, from $1.3334 yesterday. It touched $1.3470, the highest level since April 6. The European currency advanced 1 percent to 132.41 yen from 131.10. The dollar rose 0.6 percent to 98.93 yen from 98.31.


ECB President Jean-Claude Trichet described the plan to buy bonds at a press conference in Frankfurt and said the decision to cut the main refinancing rate by a quarter-percentage point to 1 percent as appropriate.
“The size that he has suggested is quiet small, and that’s euro-positive,” said Geoffrey Kendrick, a strategist in London at UBS AG, the world’s second-biggest foreign-exchange trader.


Covered bonds, known as Pfandbriefe in Germany, are secured by property loans or lending to public-sector institutions, and differ from mortgage-backed securities because they’re also supported by a borrower’s pledge to pay. They have traditionally been considered among the safest corporate bonds available, allowing lenders to pay less interest.

Covered Bonds

There were about 1.5 trillion euros of the securities outstanding in the euro region as of the end of 2007, 900 billion euros of which were German, according to BNP Paribas SA.


The Fed, the Bank of Japan and the Bank of England cut their benchmark rates to near zero and began printing money to buy government bonds to lower interest rates and ward off deflation.


“The ECB is being viewed as being a little more proactive,” said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. The advance in the euro was capped today by the 200-day moving average of $1.3474, where sell orders clustered, according to Osborne.


Sterling slid 0.5 percent to $1.5054 after the Bank of England left the nation’s key interest rate at a record low of 0.5 percent and said it will buy additional assets. It earlier traded as high as $1.5197, the strongest since Jan. 9. It weakened to 89.18 pence per euro, from 88.09 pence.

Australian Dollar

The Australian dollar rose to a seven-month high against the U.S. currency after a government report showed the jobless rate decreased for the first time since August. Australia’s dollar climbed to 75.95 U.S. cents, from 74.83 cents yesterday, and to 75.37 yen, from 73.57 yen.


The euro will “underperform” the Australian dollar after the ECB “caved into” quantitative easing, said Paresh Upadhyaya, who helps manage $21 billion in currency assets as a senior vice president at Putnam Investments in Boston.


“Today’s action does put the euro under pressure against those non-QE currencies,” said Upadhyaya.
The results of the Fed’s stress tests of the U.S. banking system, due to be released at 5 p.m. in Washington today, will show Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. together require about $54 billion, according to people familiar with the conclusions.


At the same time, Goldman Sachs Group Inc., JPMorgan Chase & Co. and Bank of New York Mellon Corp. have enough capital to help prop up flows of credit to businesses and consumers.


“The release of the U.S. bank stress results today had been much touted as a potential banana skin for the recent rally in risk assets,” Lee Hardman, a foreign-exchange strategist in London at Bank of Tokyo-Mitsubishi UFJ Ltd., wrote in a report. “As their release has edged ever closer, it appears that as a market moving event it is likely to prove little other than a damp squib.”


To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Ye Xie in New York at yxie6@bloomberg.net
Last Updated: May 7, 2009 11:18 EDT