NEW YORK (Reuters) - The euro edged higher against the dollar on Friday after its worst selloff in more than six months, buoyed by the European Central Bank’s move to make funding easier for struggling banks.
The ECB said it would allow financial institutions to pledge a wider range of assets, including collateral of a lower quality, in exchange for cash. The changes, which will be worth over 100 billion euros, marked the ECB’s second such move in six months.
Analysts, however, are skeptical about the efficacy of the move and concerns are growing that constant lowering of lending standards could make the quality of the ECB’s balance sheet deteriorate and limit its ability to respond to new financial strains.
“As far as I can tell, the intended effect is to make it easier for people, businesses, banks, etc. to borrow money by utilizing collateral that wasn’t available to use before today,” said Neal Gilbert, market strategist at GFT in Grand Rapids, Michigan.
“Whether this actually works as intended or just leads to more bad loans and, in turn, more bailouts will be closely watched,” he said.
The euro rose to as high as $1.2583 and was last at $1.2561, up 0.2 percent, on track for a weekly decline of 1.1 percent.
On Thursday, it fell about 1.3 percent, the worst daily performance since mid-December after a spate of disappointing data around the world prompted investors to seek safe-haven in the U.S. dollar.
Against the yen, the euro rose 0.3 percent to 101.03. The dollar gained 0.2 percent to 80.42 yen and was on pace for its best week since late February with a gain of 2 percent.
The ECB’s supportive move comes as Spain braces for a downgrade from ratings firm DBRS by the end of August, which is expected to pile extra misery on the country and its banks.
Spanish bond yields surged to 7.3 percent earlier this week, before easing on hopes that policymakers will take steps to alleviate pressure on the euro zone’s fourth-largest economy.
German Chancellor Angela Merkel agreed with leaders of France, Italy and Spain on a 130 billion euro ($156 billion) package to revive growth on Friday, but resisted pressure for common euro zone bonds or a more flexible use of Europe’s rescue funds.
Investors’ focus now turns to whether a June 28-29 EU summit can back up the expectations of some concrete progress towards fiscal integration and allowing the bloc’s rescue funds to buy government debt.
Analysts said the euro is likely to stay under pressure as weak euro zone data and rising borrowing costs for peripheral countries will add pressure on the ECB to cut interest rates or expand liquidity operations.
Deutsche Bank in a note said it remains bearish on euro/dollar, but said the euro’s decline may slow.
“We don’t anticipate a gamechanging June 28th EU summit, and with positioning a constraint to the downside and poor fundamentals similarly to the upside, the next few weeks may see tighter ranges,” the bank write to clients.
Currency speculators reduced bets against the euro in the week ending June 19, data from the Commodity Futures Trading Commission released on Friday showed.
Net euro short positioning fell to 141,066 contracts from 195,187 contracts a week earlier, and off a record high of 214,418 contracts reached in early June.
Earlier, the euro had come under pressure after data showing German business sentiment fell for a second successive month in June to its lowest in more than two years.
The dollar index .DXY was down 0.1 percent on the day at 82.245, having risen to 82.469, its highest since June 13.
The index was on track for its biggest weekly gain since early May, having staged its biggest rally in more than three months on Thursday.
Additional reporting by Gertrude Chavez-Dreyfuss and Julie Haviv; Editing by Chizu Nomiyama