Euro drops on lower-than-expected bank repayments

by Gertrude Chavez-Dreyfuss

The euro dropped to a six-week low against the US dollar on Friday on news that euro zone banks were to repay fewer crisis loans than expected to the the European Central Bank.

The ECB said banks will repay €61.1 billion of the second of two crisis ECB three-year loans they took a year ago. That was the less than half the amount expected by the market, casting doubts on the health of the region's financial system.

Some investors said the data signalled some banks still felt the need to keep hold of the ultra-cheap emergency loans, and means the ECB's balance sheet will shrink at a slower pace. "This means that the confidence is still not there and that's a negative for the euro," said Sebastien Galy, currency strategist, at Societe Generale in New York. "I don't think euro zone banks are confident that they can get cheaper loans elsewhere."

A report from the European Commission on Friday that forecast the euro zone economy will contract again in 2013 and caution ahead of an Italian election this weekend also weighed on the euro, which fell for a third straight session.

The euro fell as low as $US1.3156, its lowest since January 10, retreating from a session high of $US1.3244 touched after a better-than-forecast German Ifo survey suggested a brighter outlook for the euro zone's largest economy. It was last down 0.1 per cent on the day at $US1.3178, with market players reporting supporting bids around $US1.3150-60.


Europe's common currency was on pace to close lower for a third straight week. The euro has come under heavy pressure against the dollar since minutes on Wednesday fuelled speculation US policymakers may start to tighten monetary policy earlier than thought.

Some strategists said they expected the euro to grind lower ahead of the Italian elections, although it should find support around $US1.3040, near the January 10 low of $US1.3037.

Investors were wary about the risk of a fragmented Italian parliament or resurgence from former prime minister Silvio Berlusconi, which could hinder the euro zone's third largest economy from fighting its longest recession in 20 years.

Market participants in general are taking a more defensive position - betting on the euro's downside - in case of an adverse outcome in Italy. The result of the Italian vote is not expected until next week.

Bob Lynch, chief currency strategist at HSBC in New York said he continues to expect a weaker euro due to a host of technical factors. "The downward shift in momentum indicators, the break below the July 2012 uptrend, and the further shift in relative yield spreads against the euro suggest to us that the risks remain on the downside in the near-term," said Lynch.