Euro drops after German court ruling fuels uncertainty

London

THE euro weakened across the board on Tuesday after a German consitutional court ruled that the Bundesbank must stop buying government bonds if the European Central Bank cannot prove those purchases are needed.

The decision did not apply to the ECB's latest pandemic-fighting programme, a 750-billion-euro (S$1.2 trillion) scheme to prop up the economy, but the ruling unsettled financial markets, which had been calmed by aggressive ECB asset purchases to prevent the coronavirus crisis leading to an economic meltdown.

The single currency fell 0.7 per cent to US$1.0826 in the wake of the ruling and is on track for its biggest single-day drop since the beginning of April, Refintiv data showed.

"Markets don't seem to like anything that the ECB can't fix, but as things stand at the moment, this is a pretty big bump in the road," said Andrea Cicione, head of strategy at TS Lombard in London.

"People like us are going through the decision, trying to understand what it means for possible countermoves by the ECB and while this takes place, markets do not like uncertainty and that's why they're reacting negatively."

Also hurting the euro was the presence of a large long position in the single currency which has intensified the selling pressure.

Latest positioning data showed bullish euro bets were at their biggest level in nearly two years.

But the euro currency has weakened by more than 5 per cent from more than one-year highs of nearly US$1.15 hit in March.

Nomura strategists recommend a short position in euro/US dollar expecting the single currency to weaken to US$1.06 over the coming months.

The euro's drop pushed the US dollar higher for a second consecutive day with the US dollar index rising 0.4 per cent to 99.91.

"It illustrates the difficulties versus the Fed for example; the Fed has no such constraints of US states challenging QE (quantitative easing) there," Societe Generale strategist Kenneth Broux said.

The US dollar's gains were also supported after US President Donald Trump stepped up verbal attacks on China, raising fears of a new trade war. The Australian dollar edged up more than 64 Australian cents to US$0.6454 after the Reserve Bank of Australia left its targets for the cash rate and three-year government bond yields unchanged at 0.25 per cent. But the bank forecast the Australian economy would suffer its largest ever contraction in the first half of the year. REUTERS