Euro hit as ECB bond hopes fade

The euro tumbled on Friday after European Central Bank governing council member Klaas Knot poured cold water on the market’s hopes of further government bond buying by the ECB.

The single currency fell 0.8 per cent against the dollar to as low as $1.3080 to erase any gains it had made over the week after Mr Knot said the ECB was “very far” from restarting its securities markets programme. He added that he hoped it never had to be used again.

The euro had gained 0.7 per cent to Thursday before Friday’s reversal signalled a risk-off end to a volatile week.

However, the single currency still remained bound in the range it has occupied over the past six weeks. Analysts have suggested it would take concrete evidence of further quantitative easing on either side of the Atlantic to shift it out of its $1.30-$1.34 bracket.

That said, data which showed Spanish banks had increased their borrowing from the ECB from €152.4bn to €227.6bn also hit sentiment and, with Spanish and Italian bond yields coming under pressure again on Friday, the prospect of a resumption of eurozone turmoil remained a significant threat to the single currency.

The Australian dollar, which is highly correlated to Chinese demand, dropped 0.7 per cent against its US equivalent to $1.0364 as Chinese first quarter gross domestic product data came in weaker than expected.

China’s economy grew 8.1 per cent in the first quarter from a year earlier, its slowest pace in almost three years and well below a rumoured growth rate of 9 per cent which had lifted markets on Thursday evening.

However, with the pace of growth picking up in March, economists were optimistic about China’s growth prospects over the coming months.

HSBC’s China economists expect Beijing to continue stepping up easing efforts and GDP growth to bottom out in the second quarter before recovering to more than 8.5 per cent in the second half of 2012.

Such expectations of easing in China led some market watchers to suggest Aussie weakness presented a good opportunity to buy on the dips.

The US dollar was the big gainer on Friday, with the trade-weighted dollar index jumping 0.7 per cent to 79.8, supported by solid US inflation data.

The dollar index finished down just 0.1 per cent over a week in which William Dudley, president of the Federal Reserve Bank of New York, and Janet Yellen, vice-chair of the US Federal Reserve, increased market hopes of further easing by the Fed in the near future.

The dollar gained 0.2 per cent against the Japanese yen to Y80.98 and 0.6 per cent against sterling to $1.5877 on Friday.