Euro gains on ECB bond buying hopes

Wed Sep 5, 2012 4:41pm EDT
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By Edward Krudy

NEW YORK (Reuters) - The euro rose on Wednesday after media reports suggested that the European Central Bank may buy unlimited amounts of short-term government debt to ease the region's financial crisis.

Markets have been expecting ECB President Mario Draghi to unveil a bold plan at the bank's policy meeting on Thursday. A report from Bloomberg on Wednesday that suggested the purchases of the debt of some euro zone countries could be unlimited dispelled some recent skepticism about the scale of the program.

The report was enough to put a floor under European and U.S. stock markets, which have been pressured by increased wariness about the global economy after Hong Kong shares suffered their worst declines in six weeks and FedEx (FDX.N: Quote), the world's second-largest package delivery service, cut its profit forecast due to a weak economic outlook.

Earlier Wednesday, purchasing managers indexes showed slowing activity in the service sectors in China and Europe.

The ECB may also be ready to waive seniority status on government bonds it buys under the new program, which would mean investors would not rank lower in any restructuring of euro zone sovereign debt, making the bonds more attractive to private investors.

"All these reports suggest that the ECB is actually ready to do something," said Sebastien Galy, currency strategist at Societe Generale in New York.

A central bank source, however, told Reuters that the ECB is unlikely to announce that the bond purchases would be unlimited or to set even internal targets for yields or spending beforehand.

The ECB said in August it would start buying Spanish and Italian government bonds again to ease pressure on those countries' borrowing costs, but only if they first sought help from the euro zone's rescue fund and met strict conditions.   Continued...

A cameraman stands in front of the DAX board at the Frankfurt stock exchange August 29, 2012. REUTERS/Remote/Lizza May David