NEW YORK: The euro pared early gains to trade near flat against the dollar on Wednesday as investors fretted that new three-year lending from the European Central Bank to regional banks would do little to solve the monetary union's ongoing debt crisis.
The euro rose nearly 1 percent early in the day to a one-week high near $1.3200, before giving up gains to trade around $1.3063, off 0.11 percent.
The ECB's three-year lending "helps in that we do know the first-quarter funding concern for the financial sector is less of a concern," said David Watt, senior currency strategist at RBC Capital Markets in Toronto.
"But that was only one of several things we were concerned about," he added. "Does it take the pressure off the ECB to cut interest rates? Does it solve the sovereign debt situation in a real sense?"
The central bank allotted 489.2 billion euros ($639 billion) in a three-year long-term refinancing operation to struggling banks in the region, a move investors hoped would ease the credit crunch facing banks and the funding strains facing indebted European nations.
While riskier assets had climbed earlier this week in part on expectations for strong demand for the ECB lending, that relief petered out on Wednesday, as markets saw previous climbs as somewhat overdone, Watt said.
Some analysts were skeptical that banks would turn around and use the money borrowed cheaply from the ECB to buy sovereign debt of pressured euro-zone nations, such as Italy and Spain.
"The key question remains what the banks will do with the newly acquired funds," said Marc Chandler, global head of currency strategy at Brown Brothers Harriman. "We suspect that to the extent banks buy sovereign bonds, they will purchase their own sovereign's bonds rather than their neighbor's."
Many strategists believe it is difficult to reconcile the governments' desire for banks to continue buying debt with the need for banks to reduce risk exposure associated with government debt.
Alain Bokobza, the head of asset allocation at Societe Generale in London, said too much hope was being placed on the ECB's three-year loan to ease sovereigns' funding constraints.
He said gross funding needs of euro-zone sovereigns in 2012 totaled more than 1.6 trillion euros, far higher than the funding needs of European banks, estimated at 700 billion euros by the European Banking Authority.
"On the other hand, the attractiveness of buying LTRO-funded domestic government bonds for the carry is hampered by stricter capital requirements and pressure on banks to deleverage," he said.
With the holiday season under way, trading has thinned this week, as well.
"People pretty much are positioned for year-end, and people are happy to keep their heads down," Watt said. "No one wants to take a big bet at this time ... People are warehousing and waiting to see how things unfold."
Many analysts expected the euro to stay pressured.
The euro/dollar's failure to attract new buying on the break of $1.3146 indicating the euro downtrend is resuming, Bank of America Merrill Lynch said in a note to clients.
The euro briefly rose above its 14-day simple moving average but retreated from that level later in the session.
Against the yen, the US dollar was trading 0.19 percent higher at 77.990 yen.
The Australian dollar last traded little changed against its US counterpart at US$1.0078 . The single currency hit an all-time low against the Australian dollar.
The release of existing home sales data for November had fleeting impact on trading. Revisions to data for the last four years showed the housing market recession was deeper than previously thought.
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