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Euro at 26-month low on US dollar rebound

London

GAINS in the US dollar after the Federal Reserve sounded cautious on more rate cuts sent the euro to a 26-month low on Thursday, as investors decided a lengthy US easing cycle was unlikely.

In a widely expected move, the US central bank cut rates on Wednesday for the first time since the financial crisis, in response to the growing risk of higher import tariffs and a slowdown in the world's major economies. But it also signalled that the quarter point cut may not be the start of a lengthy campaign to shore up the economy.

"It's not the beginning of a long series of rate cuts," Fed chairman Jerome Powell said after the Fed's decision. However, he added: "I didn't say it's just one rate cut."

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The Fed's less dovish than expected message triggered a rebound in the dollar, sending the US dollar index to a 26-month high of 98.93 on Thursday.

The euro weakened to a 26-month low of US$1.1034 and sterling touched a 30-month low of US$1.2087.

However, both the euro and the pound were gripped by their own issues.

"You want to stay short euro and sell the rallies," said Stephen Gally, European head of forex strategy at BMO Capital Markets.

Data from the Commodity Futures Trading Commission shows that hedge funds have been doing just that. Short euro positions increased to US$5.44 billion in the week to July 26.

Investors expect the European Central Bank to take a more aggressive stance on monetary policy easing than the Fed, which would dampen appetite for the common currency. Fears that Britain may exit the European Union on Oct 31 without transitional trade agreements in place hurt sterling and the euro.

"With growth slowing below potential and inflation already well below target, there is a strong case for the ECB to act as soon as possible," said Lee Hardman, currency strategist at MUFG.

"The increasing likelihood of a 'no-deal' Brexit and lack of progress in recent US-China trade talks highlight that the outlook for the euro zone economy could yet be hit by more negative shocks heading into year end," Mr Hardman said. "In these circumstances, the euro remains vulnerable to further weakness."

The euro was last down 0.3 per cent at US$1.1037. The pound was lower by 0.2 per cent against the euro at 91.29 pence. REUTERS