The euro weakened after the European Central Bank awarded a second round of three-year loans to banks, increasing the supply of the currency and boosting demand for higher-yielding assets.
The 17-nation currency declined versus all but one of its 16 major counterparts as the ECB said it will lend financial institutions 529.5 billion euros ($712 billion) for three years, surpassing the 470 billion euros forecast by economists. The Australian dollar climbed to the strongest since August after the ECB announcement as European bond yields fell.
“The market is viewing this as generally risk-on, you’re seeing Aussie, Canada and Norway doing well,” said Steven Englander, head of Group of 10 currency strategy at Citigroup Inc. in New York. “The big market reaction in recent days has been in the degree to which short-term spreads between Spain and Italy have converged with respect to Germany.”
The euro dropped 1 percent against the New Zealand dollar, and declined 0.7 percent against Australia’s currency. The single currency fell 0.1 percent to $1.3451 at 9:34 a.m. in New York, trimming this month’s gain to 2.7 percent. It weakened 0.2 percent to 108.10 yen.
The Frankfurt-based ECB said it will lend the funds to 800 financial institutions. In the ECB’s first three-year refinancing operation in December, 523 banks borrowed 489 billion euros.
The difference, or spread, between Spanish two-year bond yields and those of similar-maturity German bunds has narrowed to 217 basis points from as high as 563 basis points in November. The spread between two-year Italian bond yields and bunds narrowed to 197 basis points today, from a high of 720 basis points in November.
The dollar declined against higher-yielding currencies before Federal Reserve Chairman Ben S. Bernanke testifies in Congress today after saying last month that policy makers are keeping open the option of another round of bond purchases.
Bernanke said after the Fed’s January meeting that the central bank is considering buying more bonds after policy makers extended their pledge to keep the benchmark interest rate at “exceptionally low levels” at least through late 2014. The Fed has engaged in two rounds of asset purchases, totaling $2.3 trillion, in so-called quantitative easing.
“What Bernanke says today is likely to confirm the market view that the Fed will stick to its low-interest-rate policy,” said Peter Rosenstreich, chief currency strategist at Swissquote Bank SA in Geneva. “That will continue to make the dollar a funding currency of choice”
Riskier currencies were also boosted after the Commerce Department said the U.S. economy expanded at a revised 3 percent annual rate, the most since the second quarter of 2010.
Canada’s dollar added 0.7 percent to 98.87 Canadian cents per U.S. dollar and reached 98.70, the strongest since Sept. 19. Norway’s krone advanced 0.6 percent to 5.5358 per dollar.
Australia’s dollar rose for a third day against the greenback after government data showed retail sales rose in January, adding to speculation the Reserve Bank will keep the highest interest rates among major developed economies.
Australian retail sales climbed 0.3 percent last month from December, when they fell 0.1 percent, the Bureau of Statistics said in Sydney today. The result matched the median forecast in a Bloomberg News survey of economists and is the biggest gain since September.
The retail sales figure “bucks the recent trend towards weakness, which I think is a positive,” said Todd Elmer, head of Group of 10 foreign-exchange strategy for Asia excluding Japan at Citigroup Inc. in Singapore. “That has the potential to support interest-rate expectations and that only adds to the attractiveness of the Aussie in a risk-on world.”
The Australian dollar rose 0.6 percent to $1.0834 after climbing to $1.0856, the strongest level since Aug. 2.
The yen fell against all of its 16 major counterparts this month, dropping 6.7 percent against nine developed-nation currencies, according to Bloomberg Correlation-Weighted Currency Indexes. The dollar fell 1.8 percent and Norway’s krone, the best performer among the 10 currencies, rose 3.4 percent.