Worries about risk taking or just profit taking could be the cause
By Deborah Levine and V. Phani Kumar, MarketWatch
NEW YORK (MarketWatch) — The euro extended losses in early U.S. trading Wednesday, after turning negative following the European Central Bank announcement that its first longer-term lending operation garnered very strong demand.
The dollar index DXY +0.31% , a measure of the greenback’s performance against six major global currencies, turned up to 79.915 from 79.871 in North America late Tuesday.
The euro EURUSD -0.23% fell from as high as $1.3198 earlier to $1.3056, down from $1.3079 in late North American trading on Tuesday.
The losses for the euro came after 523 banks across Europe asked the European Central Bank for three-year loans totalling 489 billion euros, or $641 billion.The program is known as longer-term refinancing operations, or LTROs. ECB lending to banks
A too-high amount of borrowing by European banks could spark worries that banks will pile into risky carry trades — borrowing cheaply from the European Central Bank and buying high-yielding peripheral sovereign debt.
Some analysts said that’s essentially a roundabout way for the central bank to engage in quantitative easing, but instead of buying sovereign debt itself, it’s helping banks do it.
Analysts also noted the day’s move could just be a reversal of much of the euro’s gains in the prior session in anticipation of the operation. Anticipation of ECB lending
“ ‘Buy the rumor, sell the fact’ seems fairly normal business in Europe these days, as investors and banks bought up sovereign and other collateral to offer into the ECB for cheap 3-year funding,” said Richard Gilhooly, U.S. director of interest-rate strategy at TD Securities. “The next 3-year loan operation will not be until February and we have seen profit-taking on the news.”
Yields on benchmark Spanish and Italian debt also shot back up after the tender.
Spain’s 10-year bond yield ES:10YR_ESP +0.30% rose to 5.21% from 5.05% Tuesday. The country’s 30-year bonds, which could theoretically be bought to match the maturity of the ECB loan, also rose. See story on Spanish, Italian bond yields.
Italy’s 10-year yield IT:10YR_ITA +0.29% jumped, rising 0.23% to stand at 6.33%. Italy’s 3-year yield also jumped, reaching 5.28% from 5%.
U.K. pound, Australian dollar
Among other major currency pairs, the British pound GBPUSD +0.14% rose to $1.5694 from $1.5663, paring gains made after the Bank of England released minutes of its latest policy meeting. Read more on Bank of England’s latest meeting minutes.
The Australian dollar AUDUSD -0.05% turned down, fetching $1.0107 from as high as $1.0219 earlier in the day, in a move that indicated investors were less willing to take on risk.
The Japanese yen erased gains, with the dollar USDJPY +0.06% buying ¥77.88, from ¥77.90 late Tuesday.
The yen was higher through the Asian session after the Bank of Japan cut its economic outlook because of sluggish conditions abroad and an appreciating currency, and left interest rates unchanged in the 0 to 0.1% range. More on Bank of Japan forecast and policy decision.
