Euro gains on EU common fund proposal

London

THE euro extended gains on Wednesday, climbing towards a two-week high, as a Franco-German proposal for a common fund that could move Europe closer to a fiscal union boosted demand for the currency.

But the euro's gains were hardly broad based with the single currency giving up ground against the perceived safe-haven Swiss franc as the size of the proposed fund is seen as being relatively small compared to the size of some of some European economies.

The euro edged up 0.2 per cent to US$1.0960, near to a two-week peak of US$1.09755 reached on Tuesday. Breaking that level could open the way for a test of its May 1 high of US$1.1019.

"It is a sign that major players are getting serious about pushing the limits toward what we think will inevitably be needed: region-wide fiscal spending to offset the costs of the crisis," John Velis, an FX strategist at BNY Mellon said, referring to the Franco-German proposal.

France and Germany have proposed a 500 billion euro (S$775 billion) recovery fund to offer grants to regions and sectors hit hardest by the coronavirus pandemic, and to allow borrowing by the European Commission on behalf of the whole EU.

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But the proposal may not be enough to push the euro above the US$1.10 level against the US dollar as developments in Germany suggested some push-back against more policy easing.

Earlier this month, a German constitutional court ordered the European Central Bank to justify its bond-buying scheme - the central plank in the region's response to the economic crisis.

These issues helped to pushed the Swiss franc higher against the euro and the US dollar, despite heavy intervention by the Swiss central bank, suggesting that investors remain broadly cautious.

Broader currency market volatility fell to its lowest level in more than two months, as investors waited for the outcome of the US Federal Reserve's policy minutes from its last meeting.

Elsewhere, New Zealand central bank chief Adrian Orr backtracked a little from the possibility of negative rates - a prospect he had flagged just days before - lending support to the New Zealand dollar.

The euro's modest gains pushed the US dollar on to the back foot, with the US currency holding near a three-week low of 99.225 hit in the previous session. REUTERS