British pound holds gains after government’s budget statement
By Deborah Levine and William L. Watts, MarketWatch
NEW YORK (MarketWatch) — The dollar recovered against the euro on Tuesday, though remained down against a basket of major currencies, after the European Central Bank said it didn’t fully sterilize its government-bond purchases.
The euro had traded much higher in the wake of an Italian bond auction despite a further rise in borrowing costs for the shared currency area’s third-largest economy.
The euro EURUSD +0.11% briefly turned negative and recently traded at $1.3313, off its highs above $1.34 and from $1.3307 in North American trading late Monday.
The dollar index DXY -0.14% , which measures the performance of the greenback against a basket of six major currencies, fell to 79.106 from 79.236 Monday.
A one-week liquidity-draining operation fell short of the European Central Bank’s target, meaning the central bank didn’t fully “sterilize” the impact of its government bond purchases on the money supply.
The ECB said it absorbed 194.2 billion euros ($259.2 billion) in liquidity from the financial system at its weekly tender, short of its target of 203.5 billion euros, which is the total amount of government bonds settled by the central bank since it launched the Securities Market Program in 2010.
The sterilization has been one main reason the euro hasn’t fallen much further as the sovereign-debt crisis has intensified and spread: investors have been comfortable that the ECB’s actions haven’t amounted to increasing money in the system, thereby devaluing the currency. Both the U.S. and U.K. have undertaken policies, generally known as quantitative easing, that do just that.
The ECB has occasionally fallen short of its target in the past, but this is the first time in seven months and since they began purchases a higher amount of Italian and Spanish bonds, according to TD Securities.
The ECB has left euros ”sloshing about the European financial system,” said Kathleen Brooks, research director at Forex.com. “This is QE- extremely light – more like QE- zero than diet, but it is a form of QE nonetheless and as such the euro is getting hit.”
“This isn’t formal QE and is still a very small amount of euro for the size of the euro-zone economy and compared with QE in the U.S. and U.K., so we could see a pullback,” Brooks said.
Italian auction
The euro topped $1.34 after Italy received good demand at its auction of 7.5 billion euros ($10 billion) of bonds, albeit at euro-era record-high yields.
The auction produced a three-year yield of 7.89%, a euro-era record, while sales of bonds maturing in 2020 and 2022 also produced records well above 7%. Read more on Italian bond auctions.
“Nevertheless, Italy avoided crossing the key 8% barrier and was able sell the full allotment with bid-to-cover ratio of 1.5,” said Boris Schlossberg, director of currency research at GFT. “The fact that [euro/dollar] was able rally off such dubious results from the Italian auctions says more about the oversold conditions in the forex market than it does about the underlying strength of the currency.”
Coming up, attention will turn to a meeting of euro-zone finance ministers are set to meet Tuesday night in Brussels, which will be followed by a meeting of all European Union finance ministers on Wednesday.
“Headlines from European officials over the next couple of days will take precedence in driving the market’s momentum,” strategists at BNP Paribas said. “We remain cautious, as the market remains vulnerable to headline risk ahead with the euro-group meetings taking place over the next two days.”
U.K. outlook
The British pound pared gains slightly after Chancellor of the Exchequer George Osborne’s autumn budget statement and updated budget figures from the independent Office for Budget Responsibility.
He said while the OBR has lowered its growth forecasts, the U.K. is not expected to fall into recession. Read more on U.K.’s Osborne.
Sterling GBPUSD +0.69% rose to $1.5604 from $1.5498 as investors awaited.
Against the Japanese yen USDJPY -0.04% , the dollar bought ÂĄ77.86, down from ÂĄ77.99 late Monday.
Deborah Levine is a MarketWatch reporter, based in New York.
William L. Watts is a reporter for MarketWatch in Frankfurt. Virginia Harrison in Sydney contributed to this report.
