Euro gains as risk appetite returns

London

THE euro vaulted above the US$1.24 line to the day's highs and relatively high-yielding currencies, including the Australian dollar, gained on Monday as stocks recovered, indicating investor appetite returned after Friday's brief sell-off.

But the US dollar held close to a 16-month low against the Japanese yen as broader markets remained wary about the greenback's outlook against the backdrop of concerns over a possible trade war.

"The Fed's statement last week, if anything, signals a more bullish outlook for the dollar, but we are seeing renewed weakness so this may be indicative of some structural rebalancing flows," said Richard Falkenhall, a senior FX strategist at SEB.

With positioning against the US dollar at a one-year high, according to CFTC data, and the greenback recording its biggest weekly drop in a month against a basket of currencies last week, some investors prepared for a bounce.

But cracks widened, with the US dollar plumbing to a 16-month low against the Japanese yen to 104.56 earlier and was trading slightly above that low at 105.11 yen.

Against the euro, the US dollar was trading at a 2-1/2 week low of US$1.2417, with the latest comments from Jens Weidmann, Germany's likely candidate to become the European Central Bank's (ECB) next president, also offering some support.

Mr Weidmann said market expectations of a rate hike towards the middle of next year were "not completely unrealistic", a view shared by the broader market, although some expect a rate hike by the first quarter of 2019.

Still, while the ECB is hinting at raising interest rates, the Federal Reserve is already in the midst of its rate hiking cycle, with bond markets expecting more than 100 basis points in hikes over the next year, according to Reuters data.

Global markets were shaken last week after US President Donald Trump moved to impose tariffs on Chinese goods, edging the world's two largest economies closer to a trade war, but latest reports indicated a slightly more selective stance.

The Australian dollar added 0.6 per cent to US$0.7749 and the New Zealand dollar gained nearly one per cent to US$0.7297, in a further sign that risk aversion was fading from the markets for now. REUTERS