Euro surges as ECB slows bond-buying programme

The European Central Bank (ECB) spent far less money propping up the bond markets in Europe's more indebted countries last week, figures showed Monday, reinforcing a growing view in the markets that the government debt crisis may be stabilising.

The ECB revealed that it spent only €146 million buying up government bonds last week, way down on the previous week's US$2.313 billion when concerns about a possibility of Portugal joining Greece and Ireland in the bailout club were particularly acute - buying bonds supports their prices and keeps countries' funding costs in check, taking pressure off the issuing governments and the banks that hold them.

The news prompted another run higher in the value of the euro.

Following a day largely dominated by profit-taking, the euro staked out a fresh two-month high against the dollar as traders were cheered by the confirmation that last week's further stabilisation in Europe's bond markets had very little, if anything, to do with the European Central Bank buying up the debt of the more-indebted countries, like Portugal and Greece.

By mid-afternoon London time, the euro was trading flat on the day at US$1.3642, just shy of its earlier two-month high of US$1.3659.

Before the figures were released, the euro was trading around the US$1.3580 mark following a bout of profit-taking as investors booked some of the currency's recent gains - barely two weeks ago, the euro was trading at a four-month low not much more than US$1.28.

Analysts said the bank's modest buying of bonds last week is encouraging and further reinforces hopes the European Union is finally getting a handle on the debt crisis.

"In the past few weeks, the markets have become increasingly hopeful that EU policymakers being much more focused on trying to reach a comprehensive policy solution is resolving the crisis," said Neil MacKinnon, global macro strategist at VTB Capital.

Proposals being floated include an increase in the size and scope of Europe's bailout fund, the so-called European Financial Stability Facility (EFSF).

As well as actually having more money at its disposal, there is a growing expectation that Europe's core countries, like Germany and France, will allow the EFSF to buy back bonds directly in the markets and reduce the interest payments that bailed-out countries will have to pay.

Though these sort of proposals have given the euro much-needed respite, there are many analysts who think that they will not be able to stop Europe's debt crisis from worsening, especially as many countries face years of tepid growth at best as governments continue to slash spending and raise taxes to get their public finances into some sort of shape.

- AP