The euro steadied on Thursday after rallying the previous day as major central banks acted together to ease a credit squeeze stemming from the eurozone's debt crisis, while the Australian dollar gave back some of its hefty gains. The euro hovered around $1.3451, having jumped to a one-week high of $1.3533 on Wednesday after central banks of the United States, eurozone, Canada, Britain, Japan and Switzerland lowered the cost of dollar loans to the banking system.
Market players, however, are sceptical that this will be enough to spur a sustained rally in the euro and risky assets, since the joint action is aimed at easing symptoms of the eurozone's debt crisis rather than treating the cause. "It may be effective in alleviating some of the excessive tensions in the money market. But the market still hasn't been shown any convincing steps aimed at solving the (eurozone's) debt problems," said Masahide Sato, vice president at Mizuho Corporate Bank's forex division in Tokyo.
The euro could rise toward $1.3600 or so by the end of December, Sato said, adding that one possible upside target might be the 55-day moving average that now comes in around $1.3622. Currency speculators increased their net short position in the euro to 85,068 contracts in the week ended November 22, the biggest net short position in the euro since June 2010, pointing to the potential for some short-covering in the euro.
"It's a psychological boost more than anything else in the long run. It doesn't address any kind of real fundamental problem," said Sacha Tihanyi, senior currency strategist for Scotia Capital in Hong Kong, referring to the enhanced liquidity backstop announced by the major central banks. Commodity currencies, which were given a lift on Wednesday after China cut its reserve requirements for commercial lenders for the first time in three years, gave back some of the previous day's gains.
The Australian dollar fell 0.6 percent to $1.0219 after having jumped about 2.7 percent on Wednesday. Tough resistance is seen around $1.0335/40, the 61.8 percent retracement of its fall from late October to late November. The boost in market confidence from the central banks came at an opportune time for Spain to issue up to 3.75 billion euros of bonds later on Thursday. The dollar edged up 0.1 percent against the yen to 77.68 yen.