The euro surged against the dollar after the European Central Bank announced it will lend dollars to euro-area banks, damping liquidity concern related to the region’s sovereign debt crisis. The ECB said it will cooperate with the U.S. Federal Reserve, the Bank of England, Bank of Japan and Swiss National Bank to provide three-month dollar loans to commercial banks in an effort to prevent the money market from freezing up. However, it is difficult to see this rally last for long as this measure does not tackle the root cause of the problems and to prevent a Greek default. EURUSD jumped from 1.3773 to 1.3935.
Sterling rose against the dollar as market sentiment was boosted following the ECB announcement that central banks will address the eurozone banks problems by securing dollar funding. GBPUSD rose to 1.5864 from an early low of 1.5786 but gains were short lived as cable fell back down to 1.5790 as the pound is still vulnerable to more selling due to concerns the weak UK economy could prompt the Bank of England to opt for further monetary easing. Comments from BoE policymaker Martin Weale, who told Reuters the risks of a double-dip recession had risen and that he would consider more quantitative easing if inflation looked set to undershoot the central bank’s target. EURGBP jumped from 0.8719 to 0.8788 following the ECB announcement.
The Canadian dollar edged up against its US counterpart as riskier assets were lifted by upbeat market sentiment on optimism that euro zone leaders are committed to saving Greece from default. The loonie was lifted by a broadly weaker U.S. dollar, higher oil prices and interest rate spreads moving in Canada’s favor. However, the Canadian dollar should be stronger than it is based on these factors. But investors are still not 100 percent confident that euro zone debt issues will be resolved permanently. USDCAD fell from 0.9894 to 0.9834.
Swiss franc gained over a broadly weaker dollar as USDCHF fell from 0.8750 to 0.8646 after US economic data. EURCHF rose after the ECB announcement to allow dollar funding to banks. EURCHF hit 1.2091 from 1.2040. The euro has held consistently just above 1.20 francs since the SNB stunned financial markets on September 6 by announcing it would cap the franc at 1.20 per euro, pledging to buy unlimited foreign currency if needed. Investors are betting the Swiss National Bank will succeed only temporarily in capping the euro/Swiss franc rate above 1.20 francs and are taking out options anticipating a drop to below that level in the first half of 2012.
USDJPY surprised by spiking suddenly despite a broadly weaker dollar. Traders cited market talk that the Bank of Japan was checking currency rates and was calling banks, which spooked traders and put them on alert for possible intervention. The Japanese currency has remained strong in over a month since the BOJ intervention early August and this is making market players nervous that there could be another intervention to curb yen strength. The dollar surged to 77.17 yen from 76.60.
Gold fell as market sentiment improved due to European policymakers offering plans to contain the region’s debt crisis and major central banks around the world said they would cooperate to offer three-month U.S. dollar loans to commercial banks to prevent money markets from freezing up. Investors turned to riskier assets causing gold to lose its safe haven appeal and tumbled over $30 a troy ounce from the New York session high of $1,803 to a three week low of $1,772.