Euro licks wounds at 2-month low

London

THE euro nursed losses at a two-month low on Tuesday on growing concerns that firmer US Treasury yields would reduce incremental demand for the region's bonds and stocks at a time when hedge funds have amassed record long bets in the single currency.

The US 10-year Treasury yield hit its highest in more than four years at 2.998 per cent on Monday before backing off that level and standing at 2.962 per cent in Tuesday's Asian trade and near a psychological 3 per cent mark.

That has prompted investors to take another look at the widening interest rate differential trends between the United States and Europe which hit the highest in nearly 30 years at 236 basis points last week, and protracted weakness in the greenback.

"For more than six months, dollar-liability flows have outstripped dollar-asset flows, but that is now reversing which is helping the dollar," said Hans Redeker, head of global FX strategy at Morgan Stanley based in London.

Some lingering worries that European Central Bank (ECB) policymakers may signal a more cautious stance at a policy meeting on Thursday also pulled the single currency lower, though some market analysts said that it may have fallen too far.

"We think the euro's weakness may be overdone as despite the US Treasury yield spike theme reverberating in the markets over the last 24 hours, the US economy is very much in the late stages of its economic cycle and a cautious ECB meeting is baked into markets," said Christin Tuxen, an FX strategist at Danske Bank in Copenhagen.

The single currency stabilised around US$1.22 on Tuesday after having plumbed to a low of US$1.2185 in the Asian session, its lowest since March 1. It has fallen 3 per cent from a 2018 high above US$1.2550 in mid-February.

Eurozone firms ended the first quarter with their weakest expansion since the start of 2017, according to the March Purchasing Managers' surveys. Inflation rose less than estimated last month, and investor morale in powerhouse economy Germany has tumbled.

Tuesday's data showed that business morale in Germany, France and Italy - the eurozone's three biggest economies - deteriorated in April as a stronger currency and capacity constraints limited output. REUTERS