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EUR up against USD as ECB unveiled bond-buying plan

EUR up against USD as ECB unveiled bond-buying plan

The European Central Bank (ECB) unveiled its boldest attempt to stabilise the battered single currency when its president, Mario Draghi, announced an open-ended, unlimited buying of distressed government bonds. He is hoping that ECB intervention in the bond markets will help reduce the borrowing costs of debt-laden countries such as Spain and Italy and lessen the likelihood of them needing to ask for a full sovereign bailout, an eventuality that could bankrupt the eurozone and cause the collapse of the euro.

The ECB would engage in outright monetary transactions (OMTs) to address the “severe distortions” in government bond markets based on “unfounded fears”. The maturities of the bonds would be between one and three years and there would be no limits on the size of bond purchases.

Spain is already benefiting from investors’ response to the plan where the Spanish government has managed to raise 3.5bn euros on the debt markets, selling bonds due to mature in 2014, 2015 and 2016.  The implied cost of borrowing over two years fell from 4.71% to 2.80%; the three-year rate went from 5.09% to 3.68%; and the four-year borrowing cost fell from 5.97% to 4.60%.

The Bank of England has kept the interest rates at 0.5%, and held off from any more stimulus measures in light of the recent positive reports on UK manufacturing and service sector growth. The euro advances against dollar and is trading at 1.2627-1.2685.

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