ECB Holds Rates, Expands Asset Purchases, Euro Reacts Positively

The euro rose today, rebounding from the earlier decline after the European Central Bank kept the key interest rates unchanged, but expanded its bond purchasing program.

The ECB left its target Minimum Bid Rate at 1.50 percent as was expected by most analysts (though some anticipated a cut of the rates). The bank announced its version of quantitative easing:

The Governing Council of the European Central Bank (ECB) has today decided to launch a new covered bond purchase programme (CBPP2).

The programme will have the following modalities:

purchases will be for an intended amount of â‚¬40 billion;

purchases will have the capacity to be conducted in the primary and secondary markets and will be carried out by means of direct purchases;

purchases will begin in November 2011 and are expected to be completed by the end of October 2012.

Initially, the euro reacted negatively to the announcement, but, as was theorized earlier, the expansion of the asset purchases without decreasing the interest rates proved to be beneficial to the common Europe’s currency, at least for now.

ECB President Jean-Claude Trichet spoke about a Europe bank recapitalization, reinforcing hopes the central bank is ready to support the European Union banking system:

The situation of the banking sector calls for particular attention, taking into account the interplay between sovereign risk issues and banks’ funding needs. As we have done on previous occasions, the Governing Council urges banks to do all that is necessary to reinforce their balance sheets, to retain earnings, to ensure moderation in remuneration, and to turn to the market to strengthen further their capital bases. Where necessary, they should take full advantage of government support measures, which should be made totally operational, including the possibility in future for the European Financial Stability Facility (EFSF) to lend to governments in order to recapitalise banks.

EUR/USD climbed from 1.3347 to 1.3399 today as of 16:23 GMT, following the initial drop to 1.3241. EUR/JPY went from 102.50 to 102.72, rebounding from the daily minimum of 101.65.

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