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Euro reeling after ECB liquidity splurge

Friday, September 05 12:57:11

The euro was deep in the red today, having suffered its steepest fall in three years after the European Central Bank stunned markets by cutting interest rates and embarking on a trillion-euro asset-buying binge.

The aggressive shift sent short-term bond yields into negative territory in Germany, France, the Netherlands and Austria, giving investors an overwhelming incentive to sell euros for higher-yielding assets elsewhere.

That stood in stark contrast to the United States, where upbeat data only reinforced the case for the Federal Reserve to wind down its stimulus, driving the dollar higher and sideswiping oil and gold in the process.

After surging to a 6-1/2 month high on Thursday, European share markets saw some minor profit taking as the U.S. payrolls report loomed large later in the session.

London's FTSE 100, the DAX in Frankfurt and CAC 40 in Paris were all around 0.1-0.2 percent lower but this week's gains - the fourth in a row - took the pan-regional FTSEurofirst 300 index's rise since mid August to over 8 percent.

"Ourselves along with most market participants were surprised by the degree of the action taken by the ECB yesterday," said Derek Halpenny, European head of Global Markets Research at Bank of Tokyo-Mitsubishi UFJ.

"We believe euro depreciation is what the ECB is focused on for alleviating the near-term downside inflation risks that have become apparent of late," he added, also saying the bank would cut is end of year forecast for euro.

The currency itself was licking its wounds at $1.2934, after hitting a 14-month low of $1.2920 overnight, and it seemed destined to test the July 2013 trough of $1.2898.

It hit a one-month low on the yen at 135.97, while the dollar briefly spiked to a six-year peak of 105.71 yen before steadying at 105.35.

The single currency's capitulation came after ECB President Mario Draghi announced a range of rate cuts and a new plan to push money into the flagging euro zone economy.

In a news conference, Draghi said the aim was to expand the bank's balance sheet back to the heights reached in early 2012, which equates to a rise of around 50 percent or 1 trillion euros in new assets.

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