NEW YORK: The euro slid on Wednesday after a massive European Central Bank lending operation boosted riskier currencies such as the Australian and New Zealand dollars ahead of testimony from the head of the US Federal Reserve.
The ECB allotted 530 billion euros, slightly above expectations for around half a trillion and adding to a liquidity boost that has eased immediate fears about the euro zone's debt crisis.
"The market's still digesting all this and trying to figure out what this means," said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington.
"On the one hand, it's good to see another half a trillion euros flooded into the system. That should help alleviate pressure in some of these sovereign debt markets further, and ultimately that's a good thing for the euro," he said.
"But you see that 800 banks tapped into this tender, and you have to ask yourself, are there 800 institutions in the euro zone that need assistance?"
The flood of cash was expected to encourage carry trades, where investors borrow cheap money in one place to chase higher yields elsewhere. Traders said short-term traders were selling euros to buy commodity-linked and emerging market currencies.
The euro was last down 0.16 percent at $1.3448, according to Reuters data, still in sight of the psychologically key level of $1.35. The currency has risen nearly 3 percent this month, marking its best monthly performance since October but leaving room for profit-taking.
The ECB's allotment was bigger than the previous long-term refinancing operation in December, when the euro briefly rallied nearly 1 percent before reversing gains.
The Australian dollar hit a 7-month high against the US dollar of $1.0857, extending gains after breaking above the Feb. 8 high of $1.0845. The New Zealand dollar also hit a 6-month high and the Canadian dollar a five-month peak versus the US currency.
These growth and commodity-linked currencies all gained against the euro, pulling back after sliding during the second half of February.
"We came into this in a risk-on mood and the fact it was in line should allow most of the risk-on trades to resume their climb," said Daragh Maher, FX strategist at HSBC.
The ECB operation came just hours before Fed Chairman Ben Bernanke was expected to keep another round of quantitative easing on the table in testimony before Congress, despite recent data painting a brighter picture of the world's biggest economy.
That includes figures on Wednesday showing the US economy grew a bit faster than initially thought in the fourth quarter on slightly firmer consumer and business spending, which could help to allay fears of a sharp slowdown in growth in early 2012
Markets are expecting Bernanke "provides further justification for current policy, that ultra-accommodative monetary policy remains appropriate despite improving fundamentals," said BNY Mellon currency strategist Michael Woolfolk.
"The market is looking for reasons to buy risk," he added.
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