Reuters: US Dollar Report: GLOBAL MARKETS-Euro gains on ECB bond buying hopes

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GLOBAL MARKETS-Euro gains on ECB bond buying hopes Sep 5th 2012, 17:15 Wed Sep 5, 2012 1:15pm EDT * Euro jumps on report on ECB's plans on bond purchases * Growth worries weigh on European equities * Iron ore and steel prices hit fresh lows By Edward Krudy NEW YORK, Sept 5 (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 a 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, the world's largest package delivery service, cut its profit forecast due to a weak economic outlook. 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. "They are likely to announce unlimited bond buying which sounds good, but there will conditionality attached which will keep the euro zone members from signing up to it," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York. A central bank source on Wednesday 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. The news helped pushed down yields on Spanish and Italian bonds, but stocks in European and U.S. markets struggled to make headway as the ECB would likely "sterilize" its bond buying by taking interest-bearing deposits from banks every week matching the amount spent on the bonds. Although sterilization would help allay fears about the inflationary impact of bond purchases - an olive branch to inflation hawks at Germany's Bundesbank who have opposed expanding the ECB's balance sheet - it could also limit the liquidity available in the system that could flow into stock and commodity markets. After a rally in stocks in Europe and the United States over the summer, traders feared the markets has already priced in any ECB move and would take profits when the news was announced on Thursday. The market has also been expecting that the Federal Reserve will announce new measures to stimulate the economy when it meets next week. "Even if the ECB comes with some kind of bond-buying program and the Fed announces some form of additional stimulus, I think there's a pretty good chance that the market will sell that news," said James Dailey, portfolio manger at TEAM Asset Strategy fund in Harrisburg, Pennsylvania. The euro, which had been down 0.15 percent at $1.2550 , jumped to $1.26 after the Bloomberg report, closer to Friday's two-month peak of $1.26378. European shares initially extended gains on the report before settling up 0.01 percent at 1079.24 points, though the blue-chip Euro STOXX 50 index was up 0.2 percent. "The ECB's bond buying plan is welcome, but you can't wax a car and hope it fixes the engine. Europe needs structural changes," said Manish Singh at Crossbridge Capital in a note. On Wall Street the Dow Jones industrial average gained just 0.2 percent to 13,065, while the broader Standard & Poor's 500 Index rose 0.1 percent to 1,406.29 points. The growing likelihood of ECB action to ease stresses in the European debt market had curtailed demand for safe-haven German bonds at an auction of new 10-year paper earlier in the day. The German Finance Agency, which managed the debt sale, only received bids from investors worth 3.93 billion euros ($4.9 billion) for the 5 billion of bonds it wanted to sell. Analysts said demand might have been affected by the heavy supply elsewhere in the euro zone as the Netherlands was selling a three-year dollar-denominated bond, while triple-A rated Austria also sold bonds on Tuesday. GROWTH GRIM Investors remain concerned about a global slowdown in manufacturing activity as reported by purchasing managers indexes in China, the euro zone and the United States this week. Hong Kong shares suffered their worst day in more than six weeks on Wednesday, dragged down by the growth-sensitive Chinese banking and energy sectors after brokerage downgrades and falling coal prices compounded fears of an anemic mainland economy. Earlier Wednesday, purchasing managers indexes also showed slowing activity in the service sector in China and Europe. A Reuters poll published last month predicted the euro zone would contract 0.2 percent in the three months to September. The business surveys have added weight to growing fears in the commodity markets that demand is set to wane. Prices of iron ore and steel have fallen dramatically on signs of slowing activity in China, though the slowdown has renewed hopes for central bank policy easing. Iron ore prices, which have dropped 36 percent since early July, were below $90 a tonne , their weakest level since October 2009. Steel futures hit an all-time low on the Shanghai Futures Exchange, with further falls expected. In oil markets the growth worries pushed Brent crude under $114 a barrel on Wednesday, and U.S. crude futures slid 6 cents to $95.25. Gold, which would benefit if lower growth prompts central banks into action, edged down 0.1 percent to $1,692.14 an ounce but is still trading near a six-month high. Link this Share this Digg this Email Reprints

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