Euro just off 2-decade low, volatility highest since March 2020

A pullback in the US dollar offered the euro some respite, allowing it to edge away from 2-decade lows reached this week after surging energy prices fanned recession fears.

Risky assets, including the euro, managed gradual gains on Thursday (Jul 7) as investors grappled with the risks of a recession and a potential pause in interest rate hikes.

European Central Bank minutes about its June policy meeting failed to affect the forex market.

Meanwhile, implied volatility remained near its highest levels since late March 2020 at 11.2 per cent, reflecting a nervous market while investors look at the parity between the single currency and the US dollar.

"Parity is within reach, and one can expect the market to want to see it now," said Moritz Paysen currency and rates advisor at Berenberg.

The euro rose 0.1 per cent to 1.0194 after hitting a 2-decade low at 1.01615 on Wednesday.

According to George Saravelos, global head of forex research at Deutsche Bank, "if Europe and the US slip-slide into a recession in Q3 while the Fed is still hiking rates, these levels (0.95-0.97 in EUR/USD) could well be reached."

"The 2 key catalysts to mark a turn in the USD embedded in our forecasts are a signal that the Fed is entering a protracted pause in its tightening cycle and/or a clear peak in European energy tensions via an end to Ukraine hostilities," he said.

The US dollar index - which measures the value of the currency against 6 counterparts - slipped 0.2 per cent to 106.86, pulling away from Wednesday's peak of 107.27, a level not seen since late 2002.

Commodity-linked currencies strengthened as copper prices climbed. Some investors returned to the market on Thursday after heightened recession fears sent the red metal to its lowest level in nearly 20 months.

A Bloomberg News story, citing unnamed sources, said China mulled US$220 billion stimulus with unprecedented bond sale.

"We saw a pretty muted reaction to the headline about China's stimulus plan, even for offshore yuan," said Roberto Mialich, forex strategist at Unicredit.

"We remain cautious about growth in China while we see commodity-linked currencies recovering today along with commodity prices," he added.

The offshore Chinese yuan was up 0.1 per cent against the US dollar to 6.705.

The Australian dollar rose 0.8 per cent to 0.6841 against the US dollar after recently hitting its lowest since June 2020 at 0.6762.

The Swiss Franc eased from its 7-year high, down 0.2 per cent at 0.9909.

Earlier this week, inflation staying above the Swiss National Bank's (SNB) 0-2 per cent target range for the fifth month fuelled talk that the central bank could soon tighten its policy again. Last month it hiked its policy rate for the first time in 15 years.

The SNB has signalled it is prepared to see the Swiss franc strengthen to choke off imported inflation.

Sterling was unchanged after British Prime Minister Boris Johnson said he would resign.

It was up 0.5 per cent at US$1.1977.

Analysts said the pound was mostly moving on broader economic concerns about a global recession, rather than Britain's political turmoil.

Bitcoin fell 0.7 per cent and was last trading at US$20,402. Ether fell 0.8 per cent to 1,176. REUTERS

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