By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — The dollar gained modest ground while the euro slipped versus rivals on Wednesday after banks aggressively took advantage of the European Central Bank’s first dollar-liquidity operation since major central banks moved to cut the cost of dollar funding.
The euro EURUSD -0.09% traded at $1.3370, down from $1.3416 in North American trade late Tuesday.
The shared currency lost ground after the ECB said it provided more than $50 billion in three-month loans at a fixed rate of 0.59% to a total of 34 banks at its dollar-funding operation. That’s up from $395 million to just four banks at a rate of 1.09% on Nov. 10. The ECB also provided $1.6 billion in seven-day loans at a rate of 0.58%.
Market participants had anticipated three-month demand of around $20 billion to $40 billion after the ECB and other major central banks joined forces with the Federal Reserve to cut the interest rate charged on dollar swaps amid growing signs European banks were struggling to meet dollar funding needs. Read Market Pulse about the dollar operation.
The uptake suggests the region’s banking sector continues to experience funding difficulties, said Boris Schlossberg, director of currency research at GFT, and served to unwind an earlier rally by the euro versus the dollar.
But Elsa Lignos, currency strategist at RBC Capital Markets, argued that the strong uptake was actually a positive sign for the shared currency.
“The fact that banks are now accessing less penal dollar funding from the ECB (and have the collateral to do so) is a positive step,” she said in a note.
Overall risk appetite was boosted after news reports Tuesday said European officials are in talks to double the firepower of the €440 billion European Financial Stability Facility.
European Union leaders are set to meet late Thursday and Friday in Brussels in what has been billed as yet another potentially make-or-break summit for the shared currency. German Chancellor Angela Merkel and French President Nicolas Sarkozy have vowed to press for broad treaty changes that would enshrine fiscal rules and result in automatic sanctions on countries that violate budget limits.
Meanwhile, the European Central Bank is expected to cut its key lending rate on Thursday while taking additional steps to shore up liquidity for the euro zone’s banking sector. Read more: ECB expected to ease, eye on ‘other elements.’
The dollar index DXY +0.11% , which measures the U.S. unit against a basket of six major rivals, rose to 78.623 from 78.498 late Tuesday.
The British pound GBPUSD +0.19% traded at $1.5612 compared with $1.5609. The dollar was little changed versus the Japanese currency, changing hands at 77.73 yen.
William L. Watts is a reporter for MarketWatch in Frankfurt.
