In Europe: EURO Falls As Trichet Sees ‘Intensified’ Risks

6 October 2011

ECB head speaks to the greater downside risks faced within the region as manifested in the Euro’s 10-year low against the yen.

The euro fell toward a 10-year low against the yen and weakened versus the dollar as European Central Bank President Jean-Claude Trichet said the region is facing “intensified downside risks.”

The pound slumped against all its major counterparts after the Bank of England unexpectedly expanded its bond-purchase plan. The Dollar Index gained after the U.K. central bank’s decision. The Swiss franc dropped after the central bank said its currency holdings rose to a record last month following its decision to cap the currency’s gain. Trichet spoke at a press conference after the ECB left interest ratesunchanged.

“The real economy is what markets are focused on, and Trichet has identified those intensifying risks,” said Jeremy Stretch, executive director of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “If the central bank is doing nothing about those risks in terms of absolute monetary policy, then markets regard you as missing your purpose. There are still downside risks for the euro.”

The euro fell 0.7 percent to 101.81 yen at 2:12 p.m. in London after dropping to 100.76 on Oct. 4, the weakest level since June 2001. The currency slid 0.7 percent to $1.3257. It dropped to $1.3146 on Oct. 4, the lowest since Jan. 13. The yen was little changed at 76.80 per dollar.

Sterling slumped 1 percent to $1.5305, and weakened 0.4 percent to 86.75 pence per euro.

ECB Decision

ECB officials left their benchmark rate at 1.5 percent, as predicted by 41 of 52 economists in a Bloomberg News survey. Trichet, fronting a policy decision for the final time, said the ECB will resume covered-bond purchases and reintroduce year-long loans for banks as the sovereign debt crisis threatens to freeze money markets.

“In terms of the 12-month long-term repurchase operations and the covered bond purchase program, that’s exactly what was anticipated and the market has been relatively unimpressed,” Stretch said.

Sterling tumbled after U.K. policy makers said they would increase their bond-purchase program by 75 billion pounds. The median forecast of economists surveyed by Bloomberg News was for no change.

“It’s slightly bigger than we thought,” said John Hydeskov, chief analyst at Danske Bank A/S in London. “It’s definitely not good for the pound. We’re seeing a big weakening at the moment. I would say that this can continue to 87.50 pence.”

The main rate was maintained at 0.5 percent, as predicted by all 53 economists in a separate survey.

Recovery Threatened

The central bank, which expects to complete the new round of purchases in four months, said in a statement that slowing global growth and the turmoil in Europe “threaten the U.K. recovery.” It also said it is now “more likely” that inflation will undershoot its 2 percent goal in the medium term.

The Dollar Index, which IntercontinentalExchange Inc. uses to track the greenback against the currencies of six major U.S. trading partners, gained 0.6 percent to 79.456.

The franc dropped for a second day against the dollar on speculation the central bank will impose further measures to contain its strength after imposing the cap last month at 1.20 per euro. Reserves jumped to 282.4 billion francs ($306 billion) at the end of September, from 253.4 billion francs the previous month, the SNB said.

“The Swiss National Bank supports the euro-franc exchange rate with franc sales, and there is continued speculation that the SNB might raise the lower threshold for the euro-franc from 1.20,” Lutz Karpowitz, a senior currency strategist at Commerzbank in Frankfurt, wrote in a note to clients.

The franc dropped 0.7 percent to 92.93 centimes per dollar, and fell 0.7 percent to 82.64 yen. It was little changed at 1.2346 per euro.


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