Forex News – Euro jumps after China lowers reserve deposit ratio

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Euro jumped 0.33 percent against the dollar to hit a session high of 1.3318 at around 11:00 GMT after China announced it is reducing its central bank reserve requirement.

The People’s Bank of China lowered the reserve requirement ratio for its banks by 50 basis points. This is the first time in nearly three years to ease credit strains in an effort to boost the economy as the world’s second-largest economy is showing signs of slowing down.The last time the central bank cut the reserve ratio was in December 2008, when China’s economic growth also began to struggle due to the global financial crisis at the time.

The 50-basis-point cut in the reserve ratio showed China’s monetary policy has swung into easing mode as economic growth slows while inflation eases. The central bank of China uses changes in reserve requirements as an inflation-fighting tool.

The reserve requirement (cash reserve ratio) is a central bank regulation that sets the minimum reserves each commercial bank must hold (rather than lend out) of customer deposits and notes.

Therefore the reserve cut lowers the reserve ratio for China’s biggest banks to 20 percent from record highs, and frees up funds that could increase lending to cash-deprived small firms.

The new reserve ratio comes into effect on December 5, the central bank said in an official statement on its website.

The Australian dollar surged to around 1.0066 from around $0.9974 before the announcement. The FTSE Eurofirst 300 index of European stocks turned positive, up 0.1 percent at 948.41 points. US stock futures turned positive, up by as much as 0.6 percent.