February 22, 2013 / 3:11 PM / 5 years ago

FOREX-Euro hits 6-week low on lower-than-expected bank repayments

* Banks to pay just 61.1 bln euros in loans, less than
    * EU Commission forecasts euro zone economy to shrink
    * Markets wary ahead of Italian election

    By Gertrude Chavez-Dreyfuss
    NEW YORK, Feb 22 (Reuters) - The euro dropped to a six-week
low against the dollar on Friday on news that euro zone banks
were to repay fewer crisis loans than expected to the the
European Central Bank.
    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.
That was the less than half the amount expected by the market,
casting doubts on the health of the region's financial system.
     Some investors said the data signalled some banks still
felt the need to keep hold of the ultra-cheap emergency loans,
and means the ECB's balance sheet will shrink at a slower
    "This means that the confidence is still not there and
that's a negative for the euro," said Sebastien Galy, currency
strategist, at Societe Generale in New York. "I don't think euro
zone banks are confident that they can get cheaper loans
    A report from the European Commission on Friday that
forecast the euro zone economy will contract again in 2013 and
caution ahead of an Italian election this weekend also weighed
on the euro, which fell for a third straight session.
    The euro fell as low as $1.3156, its lowest since
Jan. 10, retreating from a session high of $1.3244 touched after
a better-than-forecast German Ifo survey suggested a brighter
outlook for the euro zone's largest economy. 
    It was last down 0.1 percent on the day at $1.3178, 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 on Wednesday fuelled speculation U.S. policymakers
may start to tighten monetary policy earlier than thought.
    Some strategists said they expected 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 from 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 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
technical factors.
    "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 0.4 percent on the day to 93.46 yen,
keeping some distance from a 33-month high of 94.47 hit last
week. The euro edged up 0.3 percent to 123.18 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 realise 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 (the U.S.) are quite willing to let
the yen get to this level. My sense is that the 95-105 yen level
is the intended range."
    Meanwhile, 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 0.5 percent
to US$1.0307.
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