The euro fell sharply after 800 banks took up the European Central Bank’s final offering of bargain three-year loans that will see another €530 billion pumped into the European banking sector. The ECB’s Long Term Refinancing Operation has now added over €1 trillion to banks’ balance sheets in the space of just three months which analysts fear is devaluing the single currency. Germany criticised the operation while both the pound and US dollar took advantage after the Bank of England’s Mervyn King and the Federal Reserve’s Ben Bernanke played down talk around their respective quantitative easing programs. Investors took the opportunity to cash-in on currencies that had risen at a record pace in-step with the euro over the past two months. The Baltic currencies such as the Danish Krone were hit hard whilst the Australian dollar tumbled. The Canadian dollar’s fall was less dramatic, propped up by its close ties to the improving US economy.
Sterling
Sterling advanced by over one per cent against the euro after the European Central Bank handed another €530 billion to Europe’s banks in an effort to shore up still jittery inter-bank lending and government debt markets. Bank of England’s Mervyn King, speaking at a parliamentary hearing on monetary policy, gave no clear indication policymakers will need to pump anymore stimulus into the UK economy which gave sterling another lift. The pound also made headway against a variety of other currencies that have moved in-step with the single currency in recent months, such as the Danish Krone and New Zealand dollar.
US dollar
The US dollar soared by almost one per cent against a currency basket after Federal Reserve Chairman, Ben Bernanke, gave a cautiously optimistic assessment of the US economy. Bernanke, speaking in his semi-annual monetary policy report, said the recovery developing in the US labour market was ahead of schedule, prompting traders to re-think expectations of the Fed adding to its asset buying programme again.
Euro
The euro fell sharply from its near three-week high against the US dollar on concerns the European Central Bank’s special liquidity operations will do no more than dilute the value of the euro. The European Central Bank’s unlimited offer of cheap three-year loans to the banking sector drew interest from a mammoth 800 banks, with loans totalling around €530 billion. When added to December’s allotment, the scheme has now injected over €1 trillion into the financial system in the hope of the money finding its way into eurozone government bonds.
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