Euro sells off after report ECB considering corporate bond buys

date: 10/20/2014

The euro fell sharply against the dollar on Tuesday after Reuters reported the European Central Bank was looking at buying corporate bonds as soon as December in its efforts to revive the stagnating euro zone economy.

The move, if realized, would expand the private-sector asset-buying program the ECB began on Monday, which is aimed at fostering lending to businesses in hopes of spurring growth.

"Headlines on the market today about the ECB potentially buying corporate bonds has reinvigorated attention on the downside for the euro," said Richard Cochinos, head of Americas G10 FX strategy at Citi in New York.

"What the headlines have done is remind the market that essentially policy is dynamic and alternative options could potentially be considered,” he said.

Flows of leveraged accounts, which largely include hedge funds, have started shifting from profit-taking on short euro positions to funding emerging market trades with euros, Cochinos added.

The euro's early gains evaporated after the publication of the story, and losses extended during the New York trading session. The euro hovered just above the session low of $1.2715, off 0.58 percent. Against the yen, the euro traded at 135.98 yen, a loss of 0.65 percent.

The dollar recovered some lost ground against the Japanese currency, but was still down 0.05 percent at 106.88 yen.

If the ECB should follow through with this plan, it would likely also suppress yields on bonds held in euros in general. However, German government bond yields rose after the story was published, reflecting a repricing of expectations for inflation and a declining appetite for low-risk assets.

"That reinforces market confidence in Mr. Draghi's pledge to increase the bank's balance sheet by a significant amount," said Lee Hardman, a strategist with Bank of Tokyo-Mitsubishi in London, referring to the ECB president, Mario Draghi. "The ECB is still under pressure to do more."

The diverging directions of monetary policy between Europe and the United States have been the central argument supporting a run higher for the dollar since May.

Most major banks have lined up behind a shift in the dollar's value over the next year or two that should take it at least another 10 percent higher and potentially close to parity with the single currency.

But that move has stalled amid broader doubts about the strength of global growth and likelihood that U.S. policymakers will push ahead with rises in interest rates next year.

Early Tuesday currency trading was dominated by Chinese economic data that showed third-quarter gross domestic product growth of 7.3 percent, slightly above forecast for the world's second-largest economy. The Aussie dollar, often seen as a liquid proxy of Chinese growth prospects given Australia's large trade exposure to China, was boosted by the data, but by the end of trade on Tuesday those gains had faded. The Aussie dollar traded unchanged on the day at US$0.8779 having been as strong as US$0.8832.

The dollar did get a modest boost from the strongest U.S. existing homes sales data in a year.