Euro rises above US$1.20 for first time in more than 2 years

[LONDON] The euro advanced to its strongest level in more than two years, hours after North Korea fired a ballistic missile over Japan.

Core European bonds rallied as risk-off sentiment spread across the globe.

Europe's common currency gained for a third day even as South Korean President Moon Jae In ordered a show of force in response, which traders said highlighted its growing appeal as a haven. US Treasuries rallied and German 10-year bond yields hit a two-month low as investors sought the safest assets.

The euro has advanced more than 14 per cent against the US dollar this year on speculation that the European Central Bank will outline its intent to scale back its extraordinary package of quantitative-easing measures in the autumn.

The currency has defied analyst predictions for weakness at the start of the year, where some even predicted parity with the greenback.

"The euro rallied as the dollar is no safe haven from the North Korean factor," said Stuart Bennett, head of Group-of-10 strategy at Banco Santander SA.

"It is overvalued by most quantifiable indicators at this level, but the market is likely to pull it higher in the same way they wanted to pull it lower at the start of the year."

Leveraged and macro investors bought the euro in its latest push higher, according to foreign-exchange traders in Europe.

Demand was also driven ahead of next week's monetary-policy review by the ECB, said the traders, who asked not to be identified as they weren't authorized to speak publicly.

The euro rose 0.6 per cent to US$1.2045 as of 9am in London. The currency is now trading above the psychological US$1.2000 level for the first time since January 2015.

From a technical perspective, traders are watching US$1.2167, which marks the 50 per cent retracement of the euro's drop since 2014. 

US 10-year Treasury yields declined seven basis points to 2.09 per cent, while German 10-year yields fell as much as five basis points to 0.32 per cent, the lowest since June 27.

While ECB President Mario Draghi chose not to mention the euro's appreciation in his Jackson Hole speech on Friday, European central bank officials expressed concern about the currency's strength in the minutes from their last meeting on July 20.

"This US$1.20 break sends alarm bells off across the globe," said Neil Jones, head of hedge fund sales at Mizuho Bank.

"The market was looking for further verbal intervention from Draghi. At some point we will see this again from ECB officials, especially now we're above US$1.20."

BLOOMBERG