Euro hit by rush for US dollar as Covid-19 spreads

London

THE euro dropped back towards US$1.08 on Monday and the Australian dollar tumbled to an 11-year low as the spread of the coronavirus outside China drove fears of a pandemic and sent investors to shelter in the dollar.

The safe-haven Japanese yen and Swiss franc gained, but not by much - underlining how the US dollar has become the currency of choice for investors because the US economy is viewed as better sheltered if the virus hits global growth.

Italy, South Korea and Iran reported sharp increases in coronavirus cases over the weekend. The World Health Organization is now worried about the growing number of cases that have no clear link to the epicentre of the outbreak in China.

"If you expect global growth to be lower on the back of this ... it still makes sense to bet on a stronger dollar," said Nordea analyst Morten Lund, who also cited the US economy's relative strength and its higher yields.

The euro weakened 0.3 per cent to US$1.0805, close to last week's US$1.0778 - its lowest in nearly three years?

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"I expect euro/dollar to move lower in the short term, not only because of the incidents in Italy but also because the euro zone is much more exposed to China (than the United States)," Mr Lund said.

The US dollar gained 0.2 per cent against a basket of currencies to 99.622, close to the 99.915 level hit last week for its strongest since April 2017. US economic data last week came in below expectations.

Money markets now price in a Federal Reserve interest rate cut of 25 basis points in June, though some observers think that rising expectations of monetary easing are not hurting the dollar.

"The more challenging environment for global growth may make it even more difficult to weaken the U.S. dollar right now,"said MUFG analyst Lee Hardman.

The Australian dollar, often traded as a proxy for China risk, weakened 0.6 per cent to an 11-year low of US$0.6585. New Zealand's dollar also declined by 0.6 per cent.

The Swedish crown and Canadian dollar both fell sharply.

The Chinese yuan was among many emerging market currencies to suffer, meanwhile. Against the offshore yuan, the U.S. dollar was last up 0.1 per cent at 7.0375 yuan.

While equities tumbled and gold rallied, risk aversion did not trigger a significantly higher yen. Analysts say that investors are discounting the yen's traditional safety value owing to Japan's virus exposure. REUTERS