(Reuters) - The euro fell to a session low against the dollar on Wednesday, reversing earlier gains after a bigger-than-expected take up by banks of cheap ECB loans did little to convince investors that the Europe's deep-seated debt problems would be solved.
The central bank allotted 489.2 billion euros in a three-year long-term refinancing operation to struggling banks in the region, a move investors hoped would ease the credit crunch facing banks and the funding strains facing indebted European peripheral states.
The euro initially rose nearly 1 percent on the day to a one-week high of $1.3199, before giving up the day's gains to trade around $1.3088, almost flat on the day. Holiday-thinned markets may have helped to exacerbate the euro's choppy moves.
Analysts said many in the market were expecting healthy demand for the loans, which were a constructive way for the central bank to help struggling banks.
But they added that the tender was only one of many steps needed to help solve the euro zone debt crisis, and that the euro would remain under selling pressure in the coming months if European policymakers keep dragging their feet.
It's not much of a surprise that there was a big take up. This reduces euro zone stress for now, said Steven Saywell, head of European FX strategy at BNP Paribas.
He added: This is not the only thing the ECB needs to do. This is not going to skewer all the problems in the euro zone.
Some analysts said making more loans available was akin to quantitative easing on the part of the ECB, and was likely to keep the euro under pressure against higher-yielding currencies like the Australian and Canadian dollars.
GAINS WIPED OUT
Many strategists are of the view that it is difficult to reconcile the governments' desire for banks to continue buying debt with the need for banks to reduce risk exposure associated with government debt.
Alain Bokobza, the head of asset allocation at Societe Generale said too much hope was being placed on the ECB's three-year loan to ease sovereigns' funding constraints.
He said gross funding needs of euro zone sovereigns in 2012 total more than 1.6 trillion euros, far higher than the funding needs of European banks, estimated at 700 billion euros by the European Banking Authority.
On the other hand, the attractiveness of buying LTRO-funded domestic government bonds for the carry is hampered by stricter capital requirements and pressure on banks to deleverage, he said.
Many analysts expected the euro to stay on the back foot.
The euro's problems are not going to fade just because of the year-end, and I wouldn't go into the new year and buy the euro strongly, said Antje Praefcke, currency strategist at Commerzbank in Frankfurt.
Its recovery against the euro helped the dollar cut losses to trade steady versus a currency basket to 79.882, pulling further away from an 11-month high hit last week. Against the yen, the dollar was little changed at 77.82 yen.
The single currency hit an all-time low against the Australian dollar as slightly better risk appetite due to a rise in global share prices increased the appeal of commodity-linked currencies. This also showed that the euro was underperforming a broad based rally in stocks and higher-yielding currencies.
The Australian dollar was last up 0.34 percent at $1.0112 versus the U.S. currency.