WORLD FOREX
NEW YORK -(Dow Jones)- A coordinated effort by global central banks to improve liquidity in financial markets sent the dollar plunging Wednesday.
The dollar dropped across the board after major central banks including the Federal Reserve and European Central Bank agreed to lower the cost of emergency U.S. dollar loans. The ECB has been the biggest borrower in recent months from the Fed through the emergency lending lines as it tries to stabilize the region's banking sector beset by the ongoing debt crisis.
The move provided what analysts say is at least temporary relief from the worries that have plagued financial markets in recent weeks about evaporating liquidity. The action is also an indication that officials are trying stabilize problems in the short term while trying to hammer out longer term solutions to Europe's debt crisis, analysts said.
"This is a positive in the short-run addressing funding needs," said John McCarthy, manager director of foreign exchange at ING Capital Markets in New York. "It doesn't do anything to alleviate long-term problems."
Still, the relief was immediately apparent as the dollar tumbled abruptly on the news that borrowing the currency could become cheaper for banks around the globe.
The euro was at $1.3446 in late trading Wednesday, but hit a session high of $1.3534 just after the news broke, according to EBS via CQG. That compares to a session low of $1.3259 and a late-Tuesday level of $1.3316.
The sharp move in the euro against the dollar was exacerbated by a short squeeze as many traders unwound bets the euro would fall as the common currency shot higher on the news, said Marc Chandler, global head of foreign exchange at Brown Brothers Harriman in New York.
Speculative traders had built up their biggest anti-euro bets since June 2010 last week, according to the latest data from the Commodity Futures Trading Commission. The net short euro position, or net speculative bets the euro would fall against the dollar, totaled $14.36 billion as of Nov. 22, according to the CFTC.
The dollar's decline was universal across the board as investors sought out nearly all other currencies, as well as equities and commodities, at the expense of the greenback. Even currencies like the yen, which are considered safe havens, gained on the dollar.
The dollar dropped against the yen, falling to Y77.63 from Y77.93 late Tuesday. The dollar was trading at CHF0.9134 from CHF0.9208, while the U.K. pound was at $1.5704 from $1.5591.
The ICE Dollar Index, which tracks the U.S. dollar against a basket of currencies, was at about 78.335 from 79.007.
The so-called dollar swap lines allow central banks like the ECB to borrow dollars from the Federal Reserve in one-week or three-month periods. The ECB can then turn around and loans those dollars to European banks, which might be facing funding stresses or liquidity problems.
The ECB borrowed $552 million via the Fed swap line last as week at a rate of 108 basis points. Today's latest move to improve global financial market liquidity would cut that rate by 50 basis points, making it much cheaper for European banks to access dollars than they might otherwise be able to in traditional banking funding markets.
