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The euro stemmed a two-day drop versus the dollar as European Central Bank President Jean-Claude Trichet signaled more interest-rate increases after raising the benchmark to 1.5 percent.
The 17-member currency gained after Trichet said policy makers loosened collateral rules for Portuguese bonds to support local banks.
“We’ve seen a significant turnaround in the euro,” said John McCarthy, managing director of currency trading at ING Groep NV in New York. “In terms of accommodating Portuguese debt, it was seen as a positive and the principal reason we saw the euro rise.”
ECB policy makers increased the target lending rate by a quarter-percentage point.
“Our monetary-policy stance remains accommodative,” Trichet said at a press conference in Frankfurt. “It is essential recent price developments do not give rise to broad-based inflation pressures over the medium term.”
The ECB waived some of its collateral rules to provide a lifeline to Greek banks a year ago. While banks can currently obtain as much money as they need from the ECB for up to three months against eligible assets, including government bonds, policy makers had said they may no longer accept Greek debt as collateral if the country defaults.
Suspending the collateral rules for Portugal “does show that the ECB is willing to maintain liquidity in the market, yet it does expose the ECB to risks should we see haircuts” on defaulted bonds, said Jeremy Stretch, head of currency strategy at Canadian Imperial Bank of Commerce in London. “They are trying to be ahead of the game if Portugal’s bonds receive a default rating.”
The dollar dropped against most of its major counterparts as U.S. companies added more workers in June than economists forecast, damping demand for haven assets before the government’s payrolls report tomorrow.
Companies added 157,000 workers last month, ADP Employer Services reported today, surpassing the 70,000 forecast by 36 economists in a Bloomberg News survey. Initial jobless claims fell by 14,000 to 418,000 in the week ended July 2, the Labor Department said today.
Nonfarm payrolls increased by 105,000 in June after an advance of 54,000 in the prior month, according to the median estimate of 83 economists in a Bloomberg News survey before tomorrow’s payrolls report from the Labor Department. The unemployment rate probably stayed at 9.1 percent.
The yen and Swiss franc were the biggest losers among major currencies as stocks and commodities rallied on U.S. employment reports, boosting demand for Brazil’s real and the Canadian dollar.
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