* Banks to pay just 61.1 bln euros in ECB crisis loans
* European Commission forecasts euro zone economy to shrink
* Investors wary of Italian election outcome
By Gertrude Chavez-Dreyfuss
NEW YORK, Feb 22 The euro dropped to a six-week
low against the dollar on Friday after the European Central Bank
announced crisis loan repayments by banks that were far below
what markets had expected, casting doubts on the health of the
euro zone's financial system.
The ECB said banks will repay 61.1 billion euros of the
second of two crisis ECB three-year loans they took a year ago,
far below the 130 billion euros in repayments expected by the
"The low repayment ... will keep liquidity conditions
accommodative for the time being in the euro zone," said Nick
Bennenbroek, head of currency strategy at Wells Fargo Bank in
The data signaled that some banks still feel the need to
keep hold of the ultra-cheap emergency loans and means the ECB's
balance sheet will shrink at a slower pace.
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
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.
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.
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
The euro was last down 0.2 percent at $1.3167, with market
players reporting supporting bids around $1.3150-60.
Europe's common currency was on pace to close lower for a
third straight week.
The euro has come under heavy pressure against the dollar
since minutes of the U.S. Federal Reserve's latest meeting that
were released on Wednesday fueled speculation the Fed may start
to tighten monetary policy earlier than markets have expected.
Some strategists said they expect the euro to grind lower
ahead of the Italian elections, although it should find support
around $1.3040, near the Jan. 10 low of $1.3037.
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.
Market participants in general are taking a more defensive
position -- betting on the euro's downside -- in case of an
adverse outcome in Italy. The result of the two-day Italian vote
is not expected until next week.
Bob Lynch, chief currency strategist at HSBC in New York
said he continues to expect a weaker euro due to a host of
"The downward shift in momentum indicators, the break below
the July 2012 uptrend, and the further shift in relative yield
spreads against the euro suggest to us that the risks remain on
the downside in the near-term," said Lynch.
The euro and the dollar rose against the yen, although
strategists said the Japanese currency's three-month decline was
showing signs of losing momentum.
Expectations the new Japanese government will take
aggressive easing steps in an attempt to revive the economy have
helped the yen fall steeply across the board since November.
The dollar rose 0.3 percent on the day to 93.34 yen,
keeping some distance from a 33-month high of 94.47 hit last
week. The euro edged up 0.1 percent to 122.90 yen.
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
The Australian dollar regained ground after falling
to a four-month low of US$1.0221 against a broadly stronger U.S.
currency on Thursday. The Aussie rose 0.7 percent to US$1.0315.