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Euro climbs back above US$1.08, volatility spikes

London 

THE euro rose on Wednesday as improving risk sentiment in global markets paused the dollar's rally, providing relief to the single currency, which had earlier fallen to three-year lows after a survey showed weakening confidence in Germany.

The euro has fallen 3.6 per cent to the dollar this year, as Europe's economic data has deteriorated while that of the US mostly improved.

On Tuesday, Germany's ZEW research institute said in its monthly survey that investors' mood had deteriorated far more than expected in February, on worries Covid-19 would curtail world trade.

"I've been talking for some time about the risk of a further downturn in euro/dollar from a fundamental point of view, based largely on the widening difference in expected growth between the two regions," said Marshall Gittler, head of investment research at BDSwiss. "There's also a technical argument to be made for a lower euro: the single currency is approaching a major long-term support level."

By 4.44pm, the euro was 0.13 per cent higher at US$1.0805. One-month euro-dollar implied volatility rose to its highest in six weeks.

But amid signs that the novel coronavirus outbreak is starting to slow, global markets turned around on Wednesday. Riskier assets - stocks, oil and copper - were all up.

China posted the lowest daily increase in new infections since Jan 29, considered an indication containment efforts were working.

A Bloomberg report, citing sources, said that China is considering cash injections or mergers to bail out airlines hit by the virus also supported risk appetite.

The safe-haven Japanese yen, which tends to benefit from uncertainty, eased against the dollar to hit its lowest level in nearly a month. It last traded 0.2 per cent lower at 110.08 per US dollar.

The dollar index, which measures the US currency against a basket of its peers, was 0.04 per cent lower at 99.404.

The yield curve between US three-month bills and 10-year notes inverted overnight, a bearish economic signal.

Investors are looking to the minutes from the Federal Reserve's January meeting, due at 3am Thursday, for insight into the Fed's thinking about virus risks.

The Australian dollar gained 0.15 per cent to US$0.6697, benefiting from the risk-on mood in markets. REUTERS