Remarks by ECB’s Nowotny trigger modest short covering
By Deborah Levine and William L. Watts, MarketWatch
NEW YORK (MarketWatch) — The U.S. dollar backed off a two-year high and the euro bounced on Wednesday after a European Central Bank policy maker said he sees some arguments in favor of allowing the euro zone’s permanent rescue fund to apply for a banking license.
The euro EURUSD +0.5999% traded at $1.2129, compared with $1.2066 in North American trade late Tuesday.
The ICE dollar index DXY -0.34% fell to 83.738 from 84.009 in late North American trading Tuesday, when it reached a two-year high following a report that Greece will require additional debt restructuring.
Ewald Nowotny, a member of the ECB’s rate-setting Governing Council and head of Austria’s central bank, told Bloomberg that he saw some arguments in favor of allowing the European Stability Mechanism to apply for a bank license. That would let the ESM leverage its 500 billion euro ($606.4 billion) cash pile via loans through the ECB.
‘Other arguments’ as well
Nowotny said there were also “other arguments” and that he knew of no discussions on the issue within the ECB.
Economists played down the significance of the remarks, but they appeared to trigger a round of short covering that lifted the euro after the shared currency this week plumbed levels last seen in mid-2010.
“The short covering was helped by Nowotny’s comments that there were arguments for the ESM to get a banking license. While it would be a game changer, the odds are this will be squashed once again by someone high on principles,” said Sebastien Galy, currency strategist at Société Générale.
Brad Bechtel, strategist at Faros Trading, said the reaction to the Nowotny comments was “a bit of a pump fake as markets latched onto the headline ‘sees arguments for giving ESM a bank license,’ but failed to see that the article goes on to say that he sees arguments for not doing that as well.”
Fed factor
The WSJ Dollar Index XX:BUXX -0.35% , a new benchmark tracking the U.S. unit’s moves against some of the world’s most heavily traded currencies, fell to 72.57 from 72.81 on Tuesday.
During European trading hours, the dollar weakened as equities pushed higher, reflecting a rise in risk appetite, which robs the greenback of haven-related flows.
U.S. stocks struggled to post gains in early trading, though, allowing the dollar to recover some. In addition, supporting traders’ willingness to shift into riskier assets, a Wall Street Journal article late Tuesday said the Federal Reserve is prepared to take action, like a third round of quantitative easing, if the U.S. economy slows.
That said, the article “did not say anything that differed too much from current market thinking and reinforced the case that September is the more likely timing for QE3 than August,” said Sue Trinh, currency strategist at RBC.
British GDP
The British pound GBPUSD -0.1620% fell to $1.54746 from around $1.5510 on Tuesday.
The U.K. Office for National Statistics said second-quarter gross domestic product saw a much deeper-than-expected 0.7% quarterly drop. U.K. GDP data.
Economists said the downturn may have been exaggerated by an extra holiday in observance of Queen Elizabeth II’s Diamond Jubilee and other factors, but they noted that even with subsequent revision, the U.K. likely remained stuck in a recession.
The data will spur debate about more monetary stimulus and less fiscal tightening, said Jeremy Stretch, currency strategist at CIBC in London.
“Discussion of another rate cut, however small, will no doubt grow,” with some speculating it could occur by the end of the third quarter, he said.
The dollar rose versus the Japanese yen, buying 78.22 yen USDJPY +0.0393% USDJPY +0.0393% USDJPY +0.0393% on Wednesday, compared with ¥78.19.
The Australian dollar AUDUSD +0.5463% AUDUSD +0.5463% reached $1.0275 from $1.0231 after quarterly consumer-price data came in largely in line with expectations.
Deborah Levine is a MarketWatch reporter, based in New York.
William L. Watts is MarketWatch's European bureau chief, based in Frankfurt. Sarah Turner in Sydney contributed to this report.
