The euro notched an 11-month high versus the dollar Friday, as European banks prepared to pay back a larger-than-expected chunk of cheap, three-year loans provided by the European Central Bank.
The euro bought $1.3454 compared with $1.3318 in North American action late Thursday. Its intraday high of $1.3479 was the strongest level against the dollar since February 2012.
The euro traded at ¥122.36 versus ¥120.90, reaching its highest level versus the yen since April 2011.
Strategists said the euro rallied in anticipation of a strong repayment of the December 2011 long-term refinancing operation, or LTRO, provided by the ECB,
The ECB said 278 banks would repay €137.2 billion ($185 billion) of the December LTRO on Jan. 30, the first date early repayments are possible. That was somewhat larger than expected, though estimates had varied widely.
Anticipation that banks would move to repay a large chunk of the cheap loans has helped drive up money-market rates in recent weeks, providing support for the euro, strategists said. But the euro’s rise shouldn’t be taken as a sign of strength of the euro-zone economy, they said.
“This isn’t ‘good news’ for the euro-zone economy and it increases the divergence between the euro (trending higher on the back of decreased strains in the financial system and de facto tighter ECB policy) and the underlying economy, which isn’t in good shape,” said Kit Juckes, head of foreign exchange at Société Générale, in a note.
Indeed, billionaire hedge-fund pioneer George Soros on Thursday said the euro was likely to strengthen as the so-called currency wars heat up and other central banks move to keep policy loose relative to the ECB. See: Soros sees soaring interest rates, strong euro.
The euro was also buoyed after the Munich-based Ifo Institute reported an unexpectedly strong rise in its closely-followed German business climate index for January. Economists said the rise indicates Europe’s largest economy may have already resumed growth after a widely-suspected fourth-quarter contraction.
The ICE dollar index , which measures the greenback against a basket of six major global currencies, fell to 79.762 from 79.974 late Thursday. It was also down from last Friday’s level of 80.051.
The WSJ dollar index , which measures the U.S. unit against a slightly wider basket, slipped to 71 from 71.04.
The dollar remained lower after the U.S. Commerce Department said sales of new homes fell 7.3% in December, but that sales in 2012 hit their highest level since 2009.
Against the Japanese unit, the dollar changed hands at ¥90.94 versus ¥90.38, hitting levels last seen in June 2010. The yen has fallen sharply since trading below ¥80 versus the dollar in late September.
Japan’s new prime minister, Shinzo Abe, has pressed the Bank of Japan to adopt looser monetary policy and boost its inflation target while also undertaking fresh fiscal measures. The yen’s sharp slide, however, has started to raise the ire of other countries, who fear a sharply weakening yen will undercut them in global markets.
Michael Derks, chief strategist at FxPro in London, said yen bears must remain alert to the potential for volatility.
“It remains critical when trading the yen in the near future not to lose your head. The Japanese currency has already gone a long way, in a very short space of time, albeit for very good reasons,” Derks said in a note. “Trader positioning is quite extreme, risk/reversals are highly elevated, and the international community is starting to revolt.”
The British pound traded at $1.5804, up from $1.5787, while the Australian dollar was at $1.0421 versus $1.0458.
Marketwatch
