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ECB Pumps Record Liquidity into Market

The ECB announced that it would offer unlimited funds at below market interest rates in an effort to preempt a credit crunch heading into the end of the year. The bank confirmed it had allotted 348.6 billion euros at 4.21% to pump into the financial system, if deemed necessary. The move is another sign that last week’s coordinated intervention was deemed insufficient by the ECB to free up credit markets and deter a liquidity crisis.

The euro edged back above the 1.44-level against the dollar in a directionless session as liquidity winds down heading into the end of the year. The single currency is likely to remain under pressure as the dollar remains buoyed amid widespread position squaring and overall reassessment of the extent to which the FOMC will be able to ease rates over the coming months – given stubborn inflationary pressure in the US.

Trading conditions will likely remain thin heading into the year-end holidays, with a bias towards a higher dollar as traders close their books. Nonetheless, volatility could also pick up given the thinning liquidity.