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Euro up as ECB plan to buy state bonds takes crucial step

THE euro reversed earlier losses and rose sharply yesterday amid reports that the European Central Bank (ECB) will announce a new government bond-buying programme today to stem the eurozone crisis.

Further details of the plan will be revealed by ECB president Mario Draghi today after the ECB's policy meeting.

The bank said in August it would start buying Spanish and Italian government bonds again to ease pressure on those countries' borrowing costs but only if they first sought help from the eurozone's rescue fund and met strict conditions. Some investment houses have also speculated that it would also buy Irish and Portuguese bonds.

The rise in the euro began as the New York session opened when Bloomberg reported that Mr Draghi's plan would involve unlimited buying of government bonds. The ECB had been expected to be cautious about disclosing the size of its bond-buying, given opposition from Germany's central bank.

Under the blueprint, which may be called 'Monetary Outright Transactions', the ECB would refrain from setting a public cap on yields, according to Bloomberg.

The plan will only focus on government bonds rather than a broader range of assets and will target short-dated maturities of up to about three years, two of the people said.

Two sources told Reuters the ECB would aim to sterilise new purchases of government bonds but one of the sources added that such a step was an option rather than a must.

"The market is setting itself up for a fall," said Michael Woolfolk, senior currency strategist at BNY Mellon in New York.

"They are likely to announce unlimited bond buying, which sounds good, but there will conditionality attached which will keep the eurozone members from signing up to it."

The euro was heading close to the two-month high of $1.2636 yesterday. Volume was said by traders and analysts to be light.

Some were already betting the ECB would announce details on today, when it holds a policy meeting, of a bond-buying programme to lower Spanish and Italian borrowing costs ahead of the news but the majority of investors were sceptical.

But until the leak of the ECB's plans, they were being outweighed by pessimism that any announcement would fall short of market expectations.

And while the euro was higher, some cautioned that the volatility was far from over.

Mr Draghi told European lawmakers on Monday that purchases of short-term sovereign bonds to help debt-burdened countries would not breach European Union rules, according to a recording obtained by Reuters.

Beyond the ECB meeting, investors are looking to US non-farm payrolls data on Friday. A weaker-than-expected number could bolster expectations of more quantitative easing by the Federal Reserve, perhaps later this month. (Bloomberg)

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