European Central Bank president Jean-Claude Trichet said Thursday that the bank will extend special measures to get ready cash to banks as it responds to the government debt crisis that has engulfed the single currency zone.
But his failure to announce an increase in the pace at which the central bank buys government bonds pushed the euro sharply lower.
The euro dropped after Trichet did not discuss any expansion in the Securities Markets Program bond-buying effort, which supports government bond markets. By mid afternoon London time, the euro was trading 0.5 percent lower on the day at $1.3075.
The euro had been trading a whole cent higher on the day when Trichet took the stage in his monthly press conference in Frankfurt after the bank kept its main interest rate unchanged at the record low of 1 percent.
Europe's single currency has been buoyed in the last couple of days on speculation that the European Central Bank would step up its bond purchases. The hope was that more bond buying would contain the debt crisis that has seen Greece and Ireland needing bailouts by keeping goverment bond prices up and interest yields down.
Spiking yields can threaten to make it impossible for heavily indebted countries to borrow on bond markets and pay off debt as it comes due. That leaves them the unpalatable choice of defaulting or seeking an international bailout loan.
So far, the ECB is thought to have made around euro65 billion in direct bond purchases. The policy has proved controversial and Germany's representative on the governing council Axel Weber had recently called for the program to be axed.
The ECB's decision to prolong its one-month and three-month lending operations through to the first quarter of 2011 had been expected as Europe's debt crisis flared up again barely a month ago.
Trichet has changed course from last month's ECB meeting, when he indicated Europe was doing well enough for the bank to start withdrawing special measures to help banks.
Last weekend's crisis bailout of Ireland changed all that however. Now markets are worrying Spain might join Greece and Ireland in needing a bailout.
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