China cuts its reserve requirement ratio for banks
By William L. Watts, MarketWatch
NEW YORK (MarketWatch) — The U.S. dollar dropped more than 1% against the euro and other major currencies on Wednesday, after the world’s major central banks announced a plan to make it cheaper for banks to borrow dollars and otherwise strengthen existing swap lines.
The euro EURUSD +1.24% jumped to $1.3518, after being flat before the announcement versus $1.3329 in North American trade late Tuesday.
The dollar index DXY -1.19% , which measures the U.S. unit against a basket of six major currencies, dropped to 78.031, from 78.990 Tuesday.
Against the Japanese yen, the dollar USDJPY -0.54% dropped to 77.42 yen, up from ÂĄ77.85 Tuesday.
The British pound GBPUSD +0.96% jumped to $1.5747 from $1.5610.
The U.S. currency USDCAD -1.68% lost 1.8% against the Canadian dollar and 1.4% versus the Swiss franc USDCHF -1.26% .
U.S. Federal Reserve, the European Central Bank, the Bank of England, the Bank of Japan and the Swiss National Bank extended existing swap lines for banks to borrow dollars and lowered the cost of using them to ease strains in financial markets. In recent days, the cost of swapping euros for dollars via implied one-month cross-currency basis swaps rose to its highest level in three years. Read story on central bank swap lines.
The problem has been that traders have been attaching a stigma to banks that have to access central bank funding, making firms reluctant to use the option even though its been cheaper than the market-based rates, said David Watt, senior currency strategist at RBC Capital Markets
Central banks are “hoping the rate is so attractive that hitting the swap line makes business sense as opposed to signalling vulnerability,” he said. “They hope if they draw enough institutions, the stigma will decline, stresses on the liquidity front will ease and that will ease some of the bearish demeanor towards the euro.”
China’s reserve rate cut
The euro gained a little ground earlier following news reports saying China’s central bank cut the reserve requirement ratio for its banks by 50 basis points, the first reduction in nearly three years. The cut marks a swing to easier monetary policy amid rising global market turmoil.
But strategists said homegrown problems will continue to be the key driver of action for the euro.
As expected, the finance ministers from the 17 euro-member countries meeting in Brussels Tuesday approved the release of Europe’s portion of Greece’s 8 billion euro ($10.7 billion) aid tranche. They also agreed on a plan to leverage the funds of the €440 billion European Financial Stability Facility, or EFSF, to give the bailout fund more firepower and said it would be operational by mid-January. As planned, the fund would offer guarantees on 20% to 30% of first losses on designated sovereign bond sales.
“The problem ... is that the market sees [the enhanced EFSF] as DOA [dead on arrival],” said Steven Barrow, currency strategist at Standard Bank. “Foreign sovereign wealth funds have not shown much interest in contributing to the fund and bond-market weakness has meant that insurance guarantees have had to be increased, with the result that the leverage involved does not seem likely to take the fund above €1 trillion.”
Also, data showed unemployment throughout the euro zone ticked up to a 13-year high, though Germany’s fell back to a 20-year low. Rea about euro-zone unemployment.
