Euro falls to one-week low as easing expectations favour US$

London

THE euro fell to a one-week low against the dollar on Wednesday and towards the lower end of this year's trading range, weighed down by expectations of monetary policy easing and investors' preference for the higher-yielding US currency.

Analysts say it is unlikely the euro will recover significantly before a European Central Bank meeting next week at which policymakers might unveil plans for fresh monetary stimulus. Nearly two interest rate cuts of 10 basis points are priced in by money markets for 2019.

A worse-than-expected ZEW survey of German economic sentiment on Tuesday put further pressure on the struggling euro, one of the worst-performing currencies this week along with sterling.

The common currency was unchanged at US$1.1214 even after euro zone consumer price inflation was revised up to 1.3 per cent year on year in June and construction output showed a small contraction in May.

The euro dropped earlier to US$1.1200, the lowest since July 9. It has fallen by 2.2 per cent so far this year against the dollar and traded within a relatively narrow range of US$1.15 and US$1.11.

As the ECB meeting on July 25 approaches, the euro is likely to continue trading around current levels and possibly below US$1.12, said Kenneth Broux, head of corporate research at Societe Generale. Europe is underperforming and "I would favour long dollar in this environment," he said. Corporates and other market participants do not look overly concerned about big fluctuations in the euro, as the cost of protection against major price swings measured by the one-month options contracts is relatively low.

Meanwhile, hedge funds topped up their net short positions on the euro to US$5.02 billion in the week to July 9 while staying neutral on the dollar, according to the Commodity Futures Trading Commission.

Euro short positions increased only slightly, however, and remain close to their lowest since January.

Elsewhere, the pound slipped to another 27-month low of US$1.2382 on a combination of no-deal Brexit jitters and a stronger dollar. It also hit a fresh six-month low against the euro at 90.51 pence.

The dollar rose on Tuesday after stronger-than-expected June US retail sales data dampened expectations that the Fed could cut interest rates by 50 basis points rather than 25 bps at its month-end policy review.

An index which tracks the dollar against a basket of currencies surged to a one-week high of 97.44, but it was last down marginally at 97.309.

Some analysts doubt the dollar's robust performance is sustainable.

"The upside for the dollar we view as generally limited from here with the Fed still very likely to deliver two rate cuts through the remainder of the year," said Derek Halpenny, European head of research at MUFG. REUTERS