Luciana Lopez and Steven C. Johnson
New York— Reuters Published
The euro (EUR/USD-I1.30-0.01-0.90%)
neared a one-year low against the U.S. dollar on Wednesday after data
showed euro zone banks were still hoarding cash rather than lending it
out, unnerving markets ahead of an important Italian bond sale.
Year-end conditions kept volumes light, but traders said investors who were engaged this week were spooked by European Central Bank data showing euro zone banks deposited a record €452-billion ($585.18-billion U.S.) with the central bank.
That came just days after the ECB provided banks almost half a
trillion euros worth of three-year loans at cut-rate prices to encourage
lending and ease strains on the banking system caused by a two-year old sovereign debt crisis.
“If
European banks are still this concerned, it’s not a good sign,” said
Karl Schamotta, senior markets strategist with Western Union Business
Solutions.
Banks typically park only excess cash in the ECB’s
low-interest rate deposit accounts, often at a loss. That they were
doing so after accessing cheap ECB loans was troubling, Mr. Schamotta
said.
“That underlines the possibility that this liquidity crunch is getting worse and will continue into the new year,” he said.
The
euro fell as low as $1.2910, its lowest since Jan. 10, before clawing
back to $1.2933, about 1 per cent below its level late Tuesday in New
York. The slide below $1.30 triggered automatic sell orders that sped up
the slide, traders said.
Unease about the euro zone lifted the
safe-haven appeal of U.S. assets. The dollar rose 0.2 per cent to 77.99
yen and 0.9 per cent to 0.9424 Swiss francs, while sterling shed 1.2 per
cent to $1.5477.
Optimism seen after Italy halved the price it
pays for six-month loans faded after the ECB report and as traders
looked ahead to Thursday’s more challenging auction of three- and
10-year government debt.
Investors have been shunning
longer-maturity Italian government bonds over the last few months for
fear slow growth and a tough package of spending cuts and tax hikes will
make it difficult for the country to finance its large public debt
burden.
Italy must attract strong demand on Thursday from global
investors to hold benchmark 10-year borrowing costs below the 7 per cent
level that markets fear is not sustainable.
Even then, traders
said one or two decent auctions will not solve a two-year-old debt
crisis that has already forced Greece, Ireland and Portugal to seek
emergency rescues.
“You can’t make your decision based on one
auction,” said Ihab Salib, senior portfolio manager and head of
international fixed-income at Federated Investors in Pittsburgh. “It’s
going to be an evolution of more than one event.”
Traders
emphasized that year-end liquidity was thin, exaggerating moves, but
most said there was little reason to get long the euro before the year
ends.
“It might pop up to $1.32 because of year-end squaring, but I
haven’t really seen it. There’s no reason to own the euro going into
the new year,” said John Doyle, a currency strategist at Tempus
Consulting in Washington.
While the euro is off about 3.2 per cent
against the U.S. dollar this year, the currency has swung widely as
investors fret the 17-nation monetary union could face drastic changes
because of the debt crisis.
That volatility could continue into next year, Mr. Salib cautioned.
“Unless
you’re really doing your homework and you’re capable of being fairly
active, you’re better off just staying away,” he said. “Moves that used
to take weeks and months to develop can happen in a two- or three-day
period.”
