Nov. 30 (Bloomberg) — The euro gained the most in a month against the dollar after the Federal Reserve and five other central banks acted to make more funds available to lenders as Europe’s debt crisis threatens global economic growth.
The dollar dropped against all of its 16 most-traded counterparts as investors sought higher-yielding assets after the move was announced. Europe’s shared currency weakened earlier after euro-area finance ministers conceded efforts to expand their bailout fund missed the target and said they would seek a greater role for the International Monetary Fund.
“It’s been a major risk-positive move,” said Alan Ruskin, global head of Group-of-10 foreign-exchange strategy at Deutsche Bank AG in New York. “This addresses the funding issue, but if this was it, the market would become disillusioned quite quickly again. There’s going to need to be follow-up of a more substantial order.”
The euro strengthened 1 percent to $1.3450 at 12:07 p.m. in New York. It touched $1.3533, the strongest level since Nov. 22. The yen fell 0.6 percent to 104.35 per euro and rose 0.5 percent to 77.58 per dollar.
The 17-nation currency gained as much as 1.6 percent, the biggest intraday jump since Oct. 27, after European leaders agreed to expand their rescue fund and reached an accord with lenders on 50 percent writedowns for Greek debt.
Interest Rate Reduced
The central banks agreed to reduce the interest rate on dollar liquidity swap lines and extend their authorization through Feb. 1, 2013. The rate was cut to the dollar overnight index swap rate plus 50 basis points, or half a percentage point, from 100 basis points, the Fed said in a statement in Washington. The Bank of Canada, Bank of England, Bank of Japan, European Central Bank and Swiss National Bank are part of the coordinated move, the Fed said.
“The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity,” the statement said.
The cost for European banks to fund in dollars fell for the first time in six days, dropping from the most expensive level since the depth of the financial crisis. The three-month cross- currency basis swap, the rate banks pay to convert euro payments into dollars, fell to 1.31 percentage points below the euro interbank offer rate. It touched 1.63 percentage points earlier, the most expensive on an intraday basis since October 2008.
Eases Some Concern
“It doesn’t solve all of the euro zone’s problems, but it reduces some of the financial-system concern,” Greg Anderson, a currency strategist at Citigroup Inc. in New York, said of the central banks’ action. “You probably need to see more coming out of the Ecofin headlines today in order to push back above $1.35.”
All 27 European Union finance ministers meet today with a goal of agreeing on how to temporarily guarantee banks’ bond issuance to improve funding conditions for lending. European heads of government meet on Dec. 9 in Brussels, with Germany pushing for governance changes that would tighten enforcement of budget rules.
Euro-area finance ministers at a meeting yesterday in Brussels agreed to work on boosting the resources of the IMF so it can “cooperate more closely” with the European Financial Stability Facility, Luxembourg’s Jean-Claude Juncker told reporters.
The euro declined 1.2 percent over the past three months against nine developed-nation counterparts tracked by Bloomberg Correlation-Weighted Currency Indexes. The dollar gained 6.5 percent, and the yen appreciated 3.6 percent.
China’s Move
The dollar and yen slid earlier today as China cut the amount of cash banks must set aside as reserves to spur growth, damping demand for safer assets. The People’s Bank of China said reserve ratios will decline by 50 basis points effective Dec. 5, the first reduction since 2008.
Stocks climbed, with the Standard Poor’s 500 Index surging 3.4 percent.
Higher-yielding currencies rallied. South Africa’s rand was the biggest winner against the greenback among major currencies, gaining 2.7 percent to 8.1276. Australia’s dollar advanced 2.4 percent to $1.0244.
“This is very good for currencies in general and risk appetite, so therefore negative for the U.S. dollar,” said Kathy Lien, director of currency research at the online currency trader GFT Forex in New York. “This risk rally could last a few days because this came from left field and caught everyone by surprise and shows central banks are willing to work together.”
Canadian Dollar
Canada’s dollar rose after the nation’s economy grew at a 3.5 percent annualized pace in the third quarter, beating the 3 percent expansion forecast in a Bloomberg News survey. It strengthened 1.3 percent to C$1.0192.
The Dollar Index dropped 0.9 percent to 78.328. It remained lower after an ADP Employer Services report showed U.S. companies added 206,000 workers to payrolls in November, more than the 130,000 gain forecast in a Bloomberg survey. The Chicago Purchasing Managers Index for November and pending home sales in October also increased more than forecast.
Japan sold 9.09 trillion yen ($116.5 billion) in the foreign-exchange market from Oct. 28 to Nov. 28, the Ministry of Finance said on its website today.
The intervention to stem yen gains was the biggest on a monthly basis, surpassing the previous sale of 4.51 trillion yen in August, according to ministry data going back to 1991. The yen surged to a post-World War II record of 75.35 per dollar on Oct. 31.
–With assistance from Emma Charlton in London. Editors: Greg Storey, Kenneth Pringle
To contact the reporter on this story: Catarina Saraiva in New York at asaraiva5@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
