LTRO Expectations Weaken Dollar, Send Risk Higher

By Sam Mattera
Benzinga Guest Writer

On Tuesday, the US dollar index declined roughly 1% as nearly all risk assets rallied. The Dow Jones Industrial Average gained over 250 points in early trading, while gold and oil moved sharply higher.

The move may have been motivated by traders’ expectations, as the European Central Bank is set to unveil details of its 3-year bank funding operation (LTRO) on Wednesday.

The plan gives additional capital to European banks, which may result in a reduction of sovereign borrowing costs. With the capital provided by the LTRO, the banks could opt to purchase the debt of distressed Eurozone sovereigns, driving down yields and bringing some relief to the Eurozone crisis.

Many market commentators have criticized the plan as amounting to little more than a shell game. Bill Gross of PIMCO tweeted on Monday that it amounted to nothing more than Europe shifting funds from one hand to the other.

Even the President of the ECB—Mario Draghi—downplayed expectations for the operation when he addressed European lawmakers on Monday.

The fear is that European banks could not participate with the plan. The banks are not obligated to purchase the debt, and in fact, if they do not act together, individual banks purchasing the debt on their own could quickly open themselves up to market speculation about their solvency.

Even if the plan does work, challenges remain. Ultimately, it does little to solve the root of the problem—too much debt—and only gives the sovereigns a bit more time to get their houses in order.

Market participants have seen this tactic used repeatedly for the majority of the year, as the Eurozone has seemingly kicked the can down an endless road.

For its part, the euro gained against the US dollar, as fears that the currency could dissolve may have receded.

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