The euro rose to a new 2-1/2 month high against the dollar, and 3-1/2 high against yen during the European session this Friday as market sentiment was lifted by optimism ahead of a liquidity injection by the European Central Bank next week. The ECB will be holding a second round of LTRO, (long-term refinancing operation), allowing many European banks more access to liquidity and to be able borrow around half a trillion euros at lower rates. The first LTRO was in December.
The huge liquidity pumped into the market is some sort of relief in the short-term, and helps put aside some serious concerns regarding the Greek reform implementation risks. Preventing a liquidity crunch in the financial system is crucial at this point for Europe. The extra liquidity will persuade banks and investors to be more willing to put more capital to work and invest in risk currencies such as the euro, sterling and Australian dollar.
EURUSD hit a high of 1.3424 during the session, the highest level since December 9, rising from a session open level of 1.3370. Euro also rose against the yen, peaking at Y108.14 for the first time since November 7.
Risk sentiment resulted in a weakening U.S. dollar as investors shifted away from safe haven demand . The ICE dollar index, which measures the dollar against a basket of six currencies, traded at 78.525 today, down from 78.677 in late US trading hours the day before.
Sterling rose against the dollar, with GBPUSD rising to 1.5825 from an earlier low of 1.5721. The market surprisingly reacted positively to U.K. GDP data. Despite showing contraction of 02 percent in Q4, the data showed consumption returned to growth and is expected to hold up. Some speculate that the U.K. will avoid another recession.
The Australian dollar was a big gainer today due to positive reaction to an upbeat outlook from Reserve Bank of Australia (RBA) Governor Glenn Stevens in a press conference today. This dampened expectations for further interest rate cuts and prompted speculation for rates to remain at 4.25 percent. Such attractive returns will boost demand for the aussie. AUDUSD rose to a high of 1.0754 in the Sydney session and has been trading near that level in Europe.
The U.S. dollar extended falls against the Swiss franc, hitting its lowest in nearly 3-1/2 months, with the franc being seen as an alternative long-term safe haven versus the Japanese yen, after the Bank of Japan’s recent easing measures. USDCHF fell to 0.8972.
Dollar rose against a weaker yen, with USDJPY hitting a new seven-month high of 80.64.