Euro Jumps as ECB Expands Bond-Buying Program -- Update
04 June 2020 - 6:25PM
Dow Jones News
By Caitlin Ostroff
The euro climbed near a three-month high against the dollar and
yields on southern European debt fell as investors cheered the
European Central Bank's expansion of its bond-purchase program.
The euro rose 0.8% to $1.1323 after the ECB said Thursday it
would increase the size of its Pandemic Emergency Purchase Program
by EUR600 billion ($673 billion) to buy as much as EUR1.35 trillion
of eurozone government and corporate debt through June 2021,
putting its stimulus effort in league with the Federal Reserve's.
ECB President Christine Lagarde said members voted unanimously to
expand the program.
The increase -- larger than investors expected -- was "a good
clear message from the ECB that they are willing to go above and
beyond to continue market functioning and restart growth," said
Derek Halpenny, head of research for global markets in the European
region at MUFG Bank.
The ECB also said it would reinvest the principal payments from
maturing bonds bought under the program through the end of 2022.
The decision to reinvest PEPP proceeds should allow the ECB to
deviate more, and for longer, from its guidance governing the
proportion of bonds it can hold from each member country, according
to Pictet Wealth Management.
Yields on southern European debt declined, with the yield on the
10-year Italian government bond falling to 1.425%, from 1.599%
before the announcement -- bringing it to its lowest since late
March, according to Tradeweb. The yield on the 10-year Greek
government bond also fell to 1.434%, from 1.526% Wednesday. Bond
yields drop as prices rise.
Investors saw the increased efforts by the eurozone's central
bank as another reason for optimism following a recent proposal led
by Germany and France to issue centrally backed bonds, a move seen
to address financial divisions that have long plagued the eurozone.
Should the proposal be accepted by all 27 EU members, it would
provide grants and loans to the countries hit hardest by the
coronavirus pandemic.
"It's a two-pronged attack from the Europeans. You've got the
support from the ECB and the support from the EU recovery fund,"
said Mohammed Kazmi, a portfolio manager at Union Bancaire
Privée.
An agreement by Germany's government on a large fiscal stimulus
package aimed at supporting an economic recovery from the
coronavirus pandemic also supported the euro.
The moves have sent the euro on its longest winning streak
against the dollar since December 2013 through Wednesday. But the
euro's gains could be capped as the ECB expects gross domestic
product for the eurozone to contract by 8.7% this year, analysts
say.
While the additional stimulus is helpful, "the markets may be
getting a bit ahead of themselves in how good this will be for the
eurozone economy," said Viraj Patel, a foreign exchange and global
rates strategist at research firm Arkera. "If anything, the ECB has
to do more."
In U.S. markets, the yield on 10-year Treasurys climbed to
0.813%, from 0.761% Wednesday.
Write to Caitlin Ostroff at caitlin.ostroff@wsj.com
(END) Dow Jones Newswires
June 04, 2020 13:10 ET (17:10 GMT)
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