FOREX-Euro falls versus dollar, Moody's downgrade hits sterling

Fri Feb 22, 2013 5:30pm EST

Related Topics

* Banks to pay just 61.1 bln euros in ECB crisis loans
    * Investors wary of Italian election outcome
    * Yen resumes decline, investors see more weakness

    By Wanfeng Zhou
    NEW YORK, Feb 22 (Reuters) - The euro hit a six-week low
against the dollar on Friday after the European Central Bank
said banks will repay less than half the expected amount of
loans, while a downgrade of Britain's government bond rating
pressured sterling.
    The yen dropped against the dollar and euro, with many
investors forecasting further weakness as the Bank of Japan
looked set to ease monetary policy further to fight deflation.
    Banks will repay 61.1 billion euros ($80.8 billion) of the
second round of the ECB's three-year loans next week, far below
the 130 billion euros in repayments expected by the market. The
smaller amount suggested many banks are still dependent on the
ECB.
    "The smaller than expected payback of loans means the ECB's
balance sheet will shrink at a slower than expected pace," said
Omer Esiner, chief market analyst at Commonwealth Foreign
Exchange in Washington. It "further undermined confidence in the
state of recovery in the 17-member bloc."
    The euro fell as low as $1.3144, its lowest since
Jan. 10, retreating from a session high of $1.3244 after the
German Ifo survey showed a big jump in business morale in
Germany, suggesting a brighter outlook for the euro zone's
largest economy. 
    It was last down slightly at $1.3183, with market players
reporting supporting bids around $1.3150-60.
    Richard McGuire, senior fixed income strategist at Rabobank,
said that Italian banks may have held off repaying the loan due
to the uncertainty about the result of the Italian election this
weekend.
    Analysts are divided over whether center-left leader Pier
Luigi Bersani will be able to form a stable majority capable of
pursuing the economic reforms that an uncompetitive Italy needs
to exit recession. 
    Investors were wary about the risk of a fragmented Italian
parliament or resurgence by former Prime Minister Silvio
Berlusconi, which could hinder the euro zone's third largest 
economy from fighting its longest recession in 20 years. 
    A report from the European Commission on Friday that
forecast the euro zone economy will contract again in 2013 also
weighed on the euro, which fell for a third straight session.
 
    On the week, the euro fell 1.3 percent versus the dollar,
declining for the third straight week.
    
    UK DOWNGRADE
    Moody's Investors Service late Friday cut the United
Kingdom's credit rating to Aa1 from Aaa, citing weakness in the
nation's medium-term growth outlook that it now expects to
extend for a number of years. The outlook on the credit is
stable. 
    Sterling fell from $1.5247 to $1.5160 after Moody's
downgrade and was last at $1.5248, down slightly from the
previous day's close of $1.5253.
    "It's a pretty big deal. We didn't see a huge reaction in
the pound because it's late in the New York session. But you'll
see some more aggressive selling when the markets open on
Sunday," said Kathy Lien, managing director at BK Asset
Management in New York. "So many people were focused on the yen
and the euro that not everyone was already short sterling. So
this could compound the pain."
    Against the yen, the euro rose 0.3 percent to 123.12 yen
. The dollar rose 0.3 percent to 93.39 yen, not
far from a 33-month high of 94.47 hit last week, but was on pace
for a weekly loss of 0.3 percent.
    Some market players said the fact U.S. policymakers had not
particularly objected to yen weakness, which makes Japan's
exports more competitive relative to those of other countries,
meant the downtrend could continue.
    "We didn't really realize how aggressive the Japanese
officials would get, and we also didn't really sense the U.S.
condoning it as much as they did," said John Vail, chief global
strategist at Nikko Asset Management.
    "It could be that they are quite willing to let the yen get
to this level. My sense is that the 95-105 yen level is the
intended range."
    The Australian dollar regained ground after hitting
a four-month low of $1.0221 against a broadly stronger U.S.
currency on Thursday. It was last up 0.8 percent at $1.0325.
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