The euro climbed to a one-week peak against the US dollar on Thursday as a solid sale of Spanish and Italian debt and more upbeat comments about the eurozone economy from the European Central Bank chief eased concerns about the region's debt.
Spain sold the targeted amount at its auction of a new, three-year bond and two existing bonds maturing in 2016, while yields halved at an Italian sale, reflecting the success, at least for now, of what amounts to a back-door bailout by the ECB. The ECB, meanwhile, held rates steady at 1 percent as widely expected after two successive rate reductions, with bank president Mario Draghi citing "signs of stabilisation activity at low levels" in the eurozone economy.
Draghi also said the ECB's flood of cheap, three-year money is helping the euro-zone's banking system substantially and supporting confidence in the bloc's economy, which is showing some signs of stabilisation. His comments further drove bids in the euro, as it squeezed higher through the $1.2800 level.
"The ECB's decision to hold rates steady at 1 percent is enough sign of confidence that European financial leaders believe the Eurozone economy will stabilise and the crisis can be managed," said Jonathan Lewis, chief investment officer at Samson Capital Advisors, with assets under management of around $7 billion.
In late afternoon New York trading, the euro was about 1 percent higher at $1.28297, having touched a session high of $1.28460 on trading platform EBS. That is up sharply from a 16-month low of $1.26615 hit on Wednesday. That said, the euro is not out of the woods yet. Traders said the bias in euro/dollar remains lower below the $1.2860 level. If the pair gets above that, that should encourage further short-covering.
On the auctions, yields on benchmark 10-year yields on Spanish and Italian debt fell, extending this week's slide and retreating from levels near which other euro-zone countries have requested debt bailouts. The slide in yields helped the euro's cause as well.
Italy will launch its 2012 bond issuing campaign on Friday when it offers up to 4.75 billion euros of debt, including its three-year benchmark and two off-the-run issues. Draghi was less pessimistic about the eurozone outlook but also aware that downside risks remain, a point taken up by some analysts. "Our suspicion is that the euro zone will suffer further appreciable economic weakness over the early months of 2012, at least, and we expect the ECB to respond by cutting interest rates further," said Howard Archer, chief European and UK economist at IHS Global Insight in London. Euro/dollar gains pushed the dollar 0.7 percent lower versus a currency basket to 80.770, but it was within sight of 81.49 hit on Wednesday, its highest in 16 months. Against the yen, the dollar was down 0.2 percent at 76.770.