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CURRENCIES : Euro Falls As The Dollar Gains For The Week

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02/22/2013 | 10:12pm CEST

By Myra P. Saefong and Polya Lesova, MarketWatch

SAN FRANCISCO (MarketWatch) -- The euro slipped Friday, contributing to the currency's losses against the U.S. dollar for the week, after the European Central Bank said commercial banks would pay back early a smaller-than-expected chunk of cheap three-year loans.

The euro (EURUSD) traded at $1.3182, after a low at $1.3144, compared with $1.3187 in North American trade late Thursday. For the week, the euro fell about 1.3% versus the dollar.

Meanwhile, the ICE dollar index (DXY), which measures the greenback's moves against six major global currencies, rose to 81.454, from 81.377 in North America late on Thursday.

The index gained about 1.1% for the week.

The euro had spiked as high as $1.3245 after a much stronger-than-expected German Ifo index. It gave up those gains after the ECB said banks would repay early just 61 billion euros ($80.71 billion) of cheap loans borrowed from the central bank at its second three-year tender operation a year ago -- about half the amount expected. .

A larger-than-expected round of repayments from the ECB's first three-year tender in December 2011 had previously helped lift the euro. The paybacks are seen as supportive for the currency because they shrink the ECB's balance sheet at a time when other major central banks continue to expand theirs.

"But there's a difference between active and passive balance-sheet changes. This was a passive one, because the banks were controlling the change, not the ECB themselves," in contrast with the active QE strategies of the Federal Reserve, Bank of Japan and Bank of England, according to Simon Smith, chief economist at FxPro in London.

"But, if banks still feel they need to hold on to liquidity offered when times were bad, rather than pay it back now that things are supposedly better, it's not a resounding vote of confidence," he said.

Also clipping the euro's wings, the European Commission said it expects the euro-zone economy to contract by 0.3% in 2013, marking a second straight year of contraction. .

"The EURUSD remains poised to weaken further over the near to medium term as the fundamental outlook for the euro area turns increasingly bleak," said David Song, a currency analyst at DailyFX.

Earlier, however, the Munich-based Ifo Institute said its German business-climate indicator rose more than expected.

"A day like today once again illustrates the divergences across the euro zone. While most other euro-zone countries are moaning under the burdens of reforms, austerity and recession, the German economy continues playing in a league of its own," said Carsten Brzeski, an economist at ING in Brussels.

Dollar strength

The WSJ dollar index , a separate index capturing the currency's moves against a slightly wider basket of rival units, rose to 72.53 from 72.49 on Thursday.

"The bullish sentiment surrounding the U.S dollar gather pace" as a growing number of Federal Reserve Open Market Committee officials "saw scope to scale back on quantitative easing," said Song. "The shift in the policy outlook should prop up the greenback going forward as the central bank adopts an improved outlook for the world's largest economy."

Investors were also likely cautious ahead of the Italian general elections starting this weekend.

The Japanese currency also weakened, with the dollar (USDJPY) purchasing 93.43 yen as compared with Yen93.11. For the week, the dollar is down 0.1% versus the yen.

The dollar has risen about 7.7% over the yen in 2013 to date, helped by expectations of Japanese monetary easing.

"Prospects for further [yen] weakening depend on whether the Bank of Japan loosens policies more than priced in, and the global economy recovers," BofA Merrill Lynch analysts wrote in a note.

"Short-term [yen] moves may be more two-way compared with the past few months. In the long term, we are [yen] bearish, as Japan's unsustainable government debt dynamics and adverse demographics make inflation the main policy option," they added.

Among other major currency pairs, the British pound (GBPUSD) fetched $1.5245, unchanged from late Thursday.

The Australian dollar (AUDUSD) was among the day's strongest performers, jumping to $1.0327 from $1.0235 after Reserve Bank of Australia Gov. Glenn Stevens said, in testimony to a parliamentary committee on Friday, that interest rates were at an "appropriate" level for now. He said more time was needed for the central bank's previous interest-rate reductions to work their way through the economy. .

Subscribe to WSJ: http://online.wsj.com?mod=djnwires

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