The shrinking balance sheet of ECB has given euro the best start of the year against the dollar since 2006. The amount of cash injected by ECB into the financial markets has dropped, reducing the availability of euros in the system.
The shrinking balance sheet of ECB has given euro the best start of the year against the dollar since 2006. The amount of cash injected by ECB into the financial markets has dropped, reducing the availability of euros in the system. As per official figures, the ECB’s balance sheet dropped to 2.94 trillion euros as of Jan. 18, the lowest since Feb. 24, and down from a record of 3.1 trillion euros in June. At the same time the Federal Reserve is pumping more cash into the economy to support growth, debasing the dollar, while the Bank of Japan voted to increase its asset-purchase program.
As seen from the graph, the euro began a slide in Dec 11 as the financial institutions borrowed 1 trillion euros from ECB to stay afloat. On the flip side, the euro now has strengthened as the Spanish and Italian Banks’ demand for loans declined over a period of time. Italian banks’ borrowing from the ECB fell to 272 billion euros in December while Spain’s declined to 313.1 billion euros, the least since May. The decline in the ECB’s balance sheet points to beginning of stabilization in Europe. The transmission of monetary policy, which at one point was broken because of troubles in the banking sector, is showing signs of healing.
Below graph shows relationship between ECB’s balance sheet and euro since Dec 2010
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