Euro strengthens amid hopes of ECB bond-buying plan

THE EURO strengthened for the first time in a week against the dollar and yen amid speculation European Central Bank buying of Italian and Spanish bonds will stem surging borrowing costs for European nations.

Europe’s shared currency rose from Thursday’s five-week low versus the yen amid reports the ECB may start talks to lend to the International Monetary Fund for sovereign bailouts. The euro advanced 0.5 per cent to $1.3519 at 2:54 p.m. in New York in its first gain since November 11th. It has dropped 1.7 per cent this week, its third straight five-day loss.

“The gain we saw in the euro is reflective of hopes for a solution in Europe, as opposed to particularly strong confidence that a solution could be achieved, so you’re seeing it give back some of its gains,” said Nick Bennenbroek, head of currency strategy at Wells Fargo and Co. “I think we will test $1.3429 next week.”

The ECB bought Italian government bonds yesterday, according to five people with knowledge of the trades who declined to be identified because the transactions are private.

Three said the central bank also purchased Spanish debt. An ECB spokesman declined to comment.

Italian two-year debt yields decreased 14 basis points, or 0.14 percentage point, to 6.12 per cent. They have fallen from a euro-era record of 7.48 percent on November 10th. The notes yielded 5.66 percentage points more than comparable German bunds today, after reaching 6.85 percentage points last week, the widest since the euro was launched in 1999.

European officials may start talks with the International Monetary Fund on a mechanism for the ECB to lend to the IMF for sovereign bailouts in the region, the Dow Jones Newswires reported.

Agreement on the proposal may result in an announcement at a European Union summit on December 9th, the news agency reported, citing two unidentified people with direct knowledge of the matter. “If this story stays relevant and seems credible, the market will hold because it’s the one story that has hit the tape that seems to have the respect of the traders,” said Boris Schlossberg, director of research at online currency trader GFT Forex.

The cost for European banks to fund in dollars reached a three year high for a fourth day. Three-month cross currency basis swaps, the rate banks pay to convert euro payments into dollars, fell as much as 132 basis points below the euro inter-bank offered rate, data compiled by Bloomberg show.

It was the most expensive since December 2008.

The dollar declined against the majority of its 16 most-traded counterparts after the index of US leading indicators climbed more than forecast in October, encouraging risk appetite. Reports yesterday signalled improvement in the weakest areas of the US economy, with claims for unemployment benefits dropping to the lowest level in seven months and housing starts exceeding forecasts. – (Bloomberg)