BLBG: Euro Rises Against Dollar as ECB Plans to Buy Covered Bonds
The euro advanced against the dollar after the European Central Bank said it will purchase covered bonds to lower borrowing costs and counter the economic slump.
The 16-nation currency also rose versus the yen after ECB President Jean-Claude Trichet said policy makers decided “in principle” to buy euro-denominated covered bonds. The bank cut the region’s benchmark interest rate by a quarter point to a record low of 1 percent today, matching the prediction of all 53 economists in a Bloomberg survey.
“The ECB’s plan to buy bonds came as a surprise,” said Neil Jones, head of hedge-fund sales in London at Mizuho Corporate Banking Ltd. “A knee-jerk reaction to this would be a decline in the euro. But that could be brief as this type of policy should benefit the economy in the longer term.”
The euro climbed to $1.3400 as of 2:23 p.m. in London, from $1.3334 yesterday. Against the yen, the European currency advanced to 132.99, from 131.10 yen.
The ECB agreed on a 60 billion-euro ($80 billion) plan to buy covered bonds, Trichet said. There were about 2.1 trillion euros of the securities outstanding in the euro region at the end of 2007, according to Royal Bank of Scotland Group Plc data.
“The size that he has suggested is quiet small and that’s euro positive,” said Geoffrey Kendrick, a currency strategist in London at UBS AG, the world’s second-biggest foreign-exchange trader. “What he has announced is part quantitative easing and part credit easing. The fact that it’s not pure quantitative easing is on the margin, also positive for the euro.”
Safest Bonds
Covered bonds, known as pfandbrief in Germany, where they originated, are secured by property loans or lending to public 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.
The single currency fell against the dollar and the pound this year on concern the ECB lagged behind the U.S. and Britain in cutting rates and adopting non-conventional methods to revive the region’s $12.3 trillion economy. The Federal Reserve and 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 pound dropped 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 an additional 50 billion pounds ($75 billion) of assets as part of so-called quantitative easing.
U.K. GDP
The U.K. currency slid to $1.5054, from $1.5136 yesterday. It traded as high as $1.5197 earlier, the strongest since Jan. 9. It weakened to 89.18 pence per euro, from 88.09 pence.
“Gross domestic product fell sharply in the first quarter of 2009,” the central bank said in a statement accompanying its rate decision. “But surveys at home and abroad show promising signs that the pace of decline has begun to moderate.”
The Japanese yen weakened against all 16 most-active currencies monitored by Bloomberg as gains in U.S. stocks spurred investors to buy higher-yielding assets.
The results of the Federal Reserve stress tests, 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.
No ‘Banana Skin’
“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.”
The Australian dollar rose to a seven-month high against the U.S. currency after a government report showed the jobless rate declined for the first time since August. The Aussie also gained on optimism the U.S. cut workers at a slower pace in April, after a report yesterday signaled the labor market may be recovering.
“Economic data helped give some support to risk appetite,” Mitul Kotecha, head of global foreign-exchange strategy at Calyon in Hong Kong, wrote in a report today. The Australian and New Zealand dollars “will continue to benefit from improved carry appetite, higher commodity prices and easing risk aversion.”
Stocks Gain
Australia’s dollar climbed to 75.95 U.S. cents, from 74.83 cents yesterday, and to 75.37 yen, from 73.57 yen.
In carry trades, investors get funds in a country with relatively low borrowing costs and invest in another with higher interest rates. The risk is market moves can erase those profits. Australia’s benchmark interest rate is 3 percent, compared with 2.5 percent in New Zealand, 0.1 percent in Japan and as low as zero in the U.S.
The MSCI World Index added 1.9 percent and the Nikkei 225 Stock Average gained 4.6 percent. The dollar-yen had a correlation of 0.85 with the Nikkei in the past year, according to data compiled by Bloomberg. A value of 1 means the two move in lockstep. Japanese financial markets were closed from May 4 until today for the Golden Week holidays.
The Standard & Poor’s 500 Index rose 0.8 percent after rising to the highest since Jan. 6 yesterday as Treasury Secretary Timothy Geithner said none of the 19 banks that underwent stress tests are insolvent and the results will reassure investors and the public that the U.S. financial system is sound.
