June 30 (Bloomberg) -- The euro rose against the dollar and the yen after the European Central Bank said it would lend banks less than some analysts estimated, spurring optimism that funding pressures among financial institutions are easing. The 16-nation currency also extended gains versus the pound as the ECB said it will loan 131.9 billion euros ($161.5 billion) to banks in a three-month tender, compared with estimates of as high as 300 billion euros from some analysts. The dollar pared gains against the yen after a report showed U.S. employers added fewer jobs than forecast in June. "Many investors had worried themselves into an early grave that the banking system needs to be continuously spoon-fed by the ECB and today's far smaller award indicates that that's not necessarily the case," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group LLC in Greenwich, Connecticut. The euro advanced 0.5 percent to $1.2244 at 9:09 a.m. in New York, from $1.2188. It strengthened 0.4 percent to 108.46 yen, snapping an eight-day decline against the Japanese currency, the longest run since January 2009. The dollar fell to 88.39 yen before trading at 88.67 from 88.60 yesterday. The common currency fell yesterday to an eight-year low against the yen amid concern European banks' demand for ECB loans would signal weakness in the region's financial industry. Three-Month Cash Demand for the three-month cash today was a litmus test for the health of Europe's banking system, economists said. Laurent Fransolet, head of European fixed-income strategy at Barclays Plc in London, estimated before the ECB release that banks would ask for 250 billion euros to 300 billion euros, with the higher end of the range indicating banks were still finding it hard to fund themselves. "It's an encouraging sign that European banks don't need as much liquidity as previously thought," said Elsa Lignos, a currency strategist at Royal Bank of Canada in London. "The figure is almost half of what was expected." Banks tomorrow need to repay 442 billion euros ($540 billion) under the ECB's so-called Long-Term Refinancing Operation, a major part of its effort to contain the financial crisis last year. The central bank has reinstated unlimited three-month lending to provide banks with access to cash. Companies in the U.S. expanded payrolls by 13,000 in June, according to figures from ADP Employer Services. The figures were forecast to show a gain of 60,000 jobs, according to the median estimate of 36 economists surveyed by Bloomberg. A Labor Department report on July 2 is forecast to show payrolls declined in June, reflecting a drop in federal census workers. The yen yesterday surged to the strongest in seven weeks versus the greenback after reports showed slowing growth in China and a higher-than-forecast drop in U.S. consumer confidence, fueling concern the global economy may falter. Fed Futures A report that may show U.S. business activity expanded at a slower pace. The Institute for Supply Management-Chicago Inc. in the U.S. is forecast to report today that its business barometer fell to 59 this month from 59.7 in May, according to a Bloomberg survey. Figures greater than 50 signal expansion. "The U.S. economy is slowing down, perhaps turning into a slower trajectory for when we expect the Fed to raise rates and that translates into a lower dollar," Wilkinson said. Futures on the CME Group Inc. exchange show a 34 percent chance the Federal Reserve will hold its benchmark interest rate to a range from zero to 0.25 percent through its April 2011 meeting, up from 13 percent odds a month earlier. The potential upside for the euro against the yen is limited after the European Central Bank effectively conducted quantitative easing, according to Bank of Tokyo Mitsubishi UFJ. Euro Forecast The euro will fall close to 100 yen as Japanese investors favor U.S. assets over euro-region ones, Derek Halpenny, European head of global currency research in London, wrote in a report today. The ECB drained 31.8 billion euros in one-week funds yesterday, short of the 55 billion euros it aimed to remove from the financial system after spending that amount on European government bonds since May 10. "The ECB have been strenuous in informing the markets that every cent of purchases would be drained but already, and after a relatively small sum of purchases, the ECB has effectively conducted quantitative easing," Halpenny said. "The upside potential for euro-yen is limited in these circumstances." The euro still headed for a quarterly loss against all of its major counterparts amid concern the European fiscal crisis will derail the economic recovery. --With assistance from Matthew Brown in London and Shobhana Chandra in Washington. Editors: James Holloway

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