Dollar Rebounds as ECB Encourages lending

The dollar swung wildly against the euro Thursday, trading higher as the European Central Bank acted to encourage lending between banks, even as markets continued to absorb the Federal Reserve's rate cut to historic lows two days ago.

Meanwhile, the dollar rose sharply against the pound and the yen as a Japanese government official talked up the currency.
The 15-nation euro dropped to $1.4313 in late New York trading from $1.4349 late Wednesday. The euro peaked at $1.4719 in overnight trading, its highest point since late September, and dropped as low as $1.4182 in the afternoon -- a massive 5.4-cent swing.
The European Central Bank said it would increase the interest rate it charges banks to borrow from the ECB from a half percentage point above its benchmark refinancing rate to a whole point.

It also said it would lower the deposit rate -- the interest it pays to banks that deposit their money at the ECB -- from a half-point below the refinancing rate to a whole point below it, or 2 percent. The changes would take effect Jan. 21.
The changes mean the ECB is instituting a sort of tax on money banks have parked with it, said Benedikt Germanier, senior foreign exchange strategist for UBS AG in Stamford, Conn.
But the euro was coming off its highs even before the ECB action, he said. The move was "an incremental change in how the ECB deals with lenders, (giving) them more motivation to lend out cash." In this environment, with a very thin volume of trading, a few more sellers in the market prompted a huge price swing.

Meanwhile, the British pound sank to $1.5070 from $1.5476 late Wednesday, and hit its ninth record low against the euro in as many trading sessions at 0.9425 euro.
The dollar also rebounded to 89.42 Japanese yen from 87.96 yen.
The buck traded as low as 87.11 yen Wednesday, its weakest level since July 1995. The yen eased as the Japanese finance minister said he would "implement appropriate measures" regarding the yen's gains. The Bank of Japan began a two-day policy meeting on Thursday. It is expected to cut its current rate of 0.3 percent on Friday by at least half.

The government's statements may indicate possible intervention in the foreign exchange market to keep the yen weak, which the country's exporters depend on.
On Tuesday, the Federal Reserve slashed its federal funds rate target to between zero and 0.25 percent, down from 1 percent, a level that was already the lowest rate target in a half-century, and said it would take unprecedented moves in an effort to battle the financial crisis and deepening recession.

The Fed has now committed to increasing the money supply by expanding lending and injecting liquidity in efforts to make more credit available to consumers and businesses.
Lower interest rates can drive investors from a currency as they seek higher returns elsewhere.
In other New York currency trading, the dollar rose to 1.1997 Canadian dollars from 1.1987 late Wednesday, and slipped to 1.0754 Swiss francs from 1.0779.

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