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The ECB might be constantly rejecting any plans of stepping up its bond purchases, but it certainly has softened its stance on being the lender of last resort!

Yesterday the ECB provided 489 billion EUR worth of three-year loans to European banks, the highest figure that the central bank has shelled out in a single operation. This even beats the 450 billion EUR worth of one-year loans it provided back in 2009!

For those who have been too busy shopping for holiday gifts, you should know that the ECB recently launched its unlimited three-year loan program, or long-term refinancing operation (LTRO), designed to help ease liquidity for European banks. The ECB reports that a total of 523 banks asked for loans yesterday, and will be charged at the ECB’s benchmark interest rate of 1.00%.

The announcement initially caused EUR/USD to spike to the 1.3200 handle as investors took the ECB’s involvement as a sign that the central bank has softened its stance on being a lender of last resort. The ECB believes that lending to European banks will not only ease liquidity and inspire bond-buying, but also restore confidence in the region’s banks.

EUR/USD during ECB announcement

Unfortunately, there are those who are skeptical over the impact of the ECB’s LTRO. You see, some believe that the program will only have a limited effect on the market and that it would serve as just another temporary patch-work job to ease the pain on the euro zone’s financial system.

Analysts are concerned that instead of using the funds to buy government bonds, banks might use the new funds to refinance debt and pay off the private sector. This would severely limit the power of the program to take off some pressure on European bond yields.

In addition, there are some who worry on its effect on the euro. Remember, the new lending program is essentially another method for the ECB to print money. Over time, the additional supply of euros might dilute the value of the existing bills.

For now, we’ll have to wait and see whether the program will have a lasting positive effect on the euro zone. At the very least, we now know that the ECB is determined to fire all ammunition that it has in its war chest to try and protect the euro zone’s financial system. In the meantime, all we can do is keep an eye on our charts and see how traders will take in the ECB’s latest moves.