Euro falls as concerns about low inflation resurface

London

THE euro fell on Tuesday, as concerns about weak inflation and a slowdown in company borrowing raised questions about the momentum of the eurozone's economic expansion.

After a big gain on Monday, the euro had added another 0.3 per cent to hit US$1.2476 in early European trading, less than a cent off the three-year highs it hit in mid-February. Receding worries about a trade war had supported euro bulls. But it went into reverse after data showing that lending to eurozone companies slowed last month, and comments by European Central Bank governing council member Erkki Liikanen that underlying eurozone inflation may remain lower than expected even if growth is robust.

The single currency declined 0.3 per cent to US$1.2405 by 1105 GMT. The US dollar, measured against a basket of currencies, used the euro's weakness to rally 0.4 per cent to 89.424, bouncing off the five-week lows hit on Monday.

"The (eurozone) economy has been doing extremely well, but inflation is still lagging. The market has been focused on the economy, now the economy is stalling, this is adding to investors' doubt," said Commerzbank's Frankfurt-based FX strategist Thu Lan Nguyen.

"The market is pricing in rate hikes as soon as spring next year, in our view it's too optimistic. We assume the market will price these hikes out in the course of this year and because of that the euro will weaken."

Elsewhere, the safe-haven Japanese yen sagged as trade war worries abated. The yen fell 0.3 per cent to 105.74 yen versus the US dollar, giving up some of its large gains last week when investors had fretted about trade tensions.

The euro in Asian trading rose 0.3 per cent against the yen to 131.69 yen, after surging 1.4 per cent on Monday for its biggest one-day percentage gain since June 2017. It later fell back, leaving the yen up 0.1 per cent at 131.13 yen per euro.

Asian currencies such as the Korean won and Chinese yuan, which hit a new 2-1/2 year high, were also big winners overnight.

The offshore yuan strengthened to a high of 6.2364, the firmest level since Aug 11, 2015, before falling back.

The Malaysian ringgit earlier hit a two-month high of 3.8700 against the US dollar. REUTERS