Euro highest since May 2018, US dollar at new low

London

THE euro neared the US$1.20 mark on Monday after it scaled another 28-month high; and the US dollar slipped to a multi-year low as investors bet that the Federal Reserve's policy framework meant that US rates would stay low for longer.

The euro reached US$1.1997 in Asian trading hours, its strongest since May 2018, taking its gains to 7.5 per cent in three months.

The Fed's announcement last week that it would tolerate periods of higher inflation and focus more on average inflation and higher employment has encouraged traders to sell the greenback. Political uncertainty ahead of November's presidential election and concerns about US economic recovery have also weakened the greenback, with the euro the biggest beneficiary.

Eurozone flash inflation data for August was lower than expected as energy prices fell sharply but it did not reverse the euro's gains.

ING analysts said "no imminent response from the ECB (European Central Bank) is likely and as the US dollar outlook remains unappealing, the bias remains for higher EUR/USD this week".

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The euro was last up 0.3 per cent at US$1.1976. The dollar index - which measures the US currency against a basket of rivals - was down 0.3 per cent at 91.917 at 10.20am GMT after earlier hitting its lowest since April 2018.

Pimco money managers said the US dollar was "set to decline further" as the Fed keeps rates very low for years. In previous depreciation cycles, they said the real trade-weighted dollar had fallen some 15 per cent to 20 per cent relative to current levels but even then the greenback would only be"marginally undervalued".

The Chinese yuan brushed off concerns about diplomatic tension over Taiwan to reach its strongest since May 2019. In offshore markets, the US dollar fell 0.5 per cent against the yuan to 6.8135.

Viraj Patel, FX and Global Macro strategist at Arkera, said China's yuan rallying was a "sign of strong capital inflows". "But Beijing's also allowing USD/CNY to move lower to avoid attention from the White House over its FX policy," he added.

The greenback's decline saw several other currencies hit milestones. The British pound gained 0.7 per cent to US$1.3465, the highest since December, helped by US dollar weakness and after Japan's foreign minister said a broad agreement on a Japan-UK trade deal was close. REUTERS