By Caitlin Ostroff
The euro climbed near a three-month high against the dollar and yields on southern European debt fell as investors cheered the European Central Bank's expansion of its bond-purchase program.
The euro rose 0.8% to $1.1323 after the ECB said Thursday it would increase the size of its Pandemic Emergency Purchase Program by EUR600 billion ($673 billion) to buy as much as EUR1.35 trillion of eurozone government and corporate debt through June 2021, putting its stimulus effort in league with the Federal Reserve's. ECB President Christine Lagarde said members voted unanimously to expand the program.
The increase -- larger than investors expected -- was "a good clear message from the ECB that they are willing to go above and beyond to continue market functioning and restart growth," said Derek Halpenny, head of research for global markets in the European region at MUFG Bank.
The ECB also said it would reinvest the principal payments from maturing bonds bought under the program through the end of 2022. The decision to reinvest PEPP proceeds should allow the ECB to deviate more, and for longer, from its guidance governing the proportion of bonds it can hold from each member country, according to Pictet Wealth Management.
Yields on southern European debt declined, with the yield on the 10-year Italian government bond falling to 1.425%, from 1.599% before the announcement -- bringing it to its lowest since late March, according to Tradeweb. The yield on the 10-year Greek government bond also fell to 1.434%, from 1.526% Wednesday. Bond yields drop as prices rise.
Investors saw the increased efforts by the eurozone's central bank as another reason for optimism following a recent proposal led by Germany and France to issue centrally backed bonds, a move seen to address financial divisions that have long plagued the eurozone. Should the proposal be accepted by all 27 EU members, it would provide grants and loans to the countries hit hardest by the coronavirus pandemic.
"It's a two-pronged attack from the Europeans. You've got the support from the ECB and the support from the EU recovery fund," said Mohammed Kazmi, a portfolio manager at Union Bancaire Privée.
An agreement by Germany's government on a large fiscal stimulus package aimed at supporting an economic recovery from the coronavirus pandemic also supported the euro.
The moves have sent the euro on its longest winning streak against the dollar since December 2013 through Wednesday. But the euro's gains could be capped as the ECB expects gross domestic product for the eurozone to contract by 8.7% this year, analysts say.
While the additional stimulus is helpful, "the markets may be getting a bit ahead of themselves in how good this will be for the eurozone economy," said Viraj Patel, a foreign exchange and global rates strategist at research firm Arkera. "If anything, the ECB has to do more."
In U.S. markets, the yield on 10-year Treasurys climbed to 0.813%, from 0.761% Wednesday.
Write to Caitlin Ostroff at firstname.lastname@example.org