Euro pushback ends US dollar recovery

London

THE euro edged higher on Monday and the dollar fell back, as a strong start to the week for equity markets ended a rally for the greenback.

The dollar last week had its best performance against the euro since November 2016 as a brutal sell-off across asset classes forced investors betting against the US currency to unwind their positions. The dollar also benefited as nervous investors bought the relative safety of some US assets.

On Monday, the dollar's rally came to an end as the euro staged a fightback.

Appetite for risk-taking crept back into currency markets to the detriment of the US currency - it also helped higher-yielding emerging market currencies as well as commodity-linked currencies like the Australian and Canadian dollars.

The dollar was down 0.2 per cent against a basket of currencies, erasing some of the gains last week.

European shares rallied on Monday after Asian markets had found a semblance of calm.

The sell-off last week spilled over into currencies, forcing many traders to exit higher yielding but riskier currencies and seek safety in the Japanese yen and Swiss franc.

One of the most popular trades of the year has been to buy euros, betting that the European Central Bank would tighten monetary policy faster than expected.

"We have a little bit of risk appetite back into the market," said Nordea Markets currency strategist Niels Christensen, adding that the US consumer price inflation numbers due on Wednesday would be the decisive data for dollar direction this week.

"The market is still extremely long positioned on the euro.

These investors will be quick to reduce their positions," he said.

The euro was up 0.1 per cent at US$1.2270 after earlier hitting a day's high of US$1.2298. The euro suffered its worst week since November 2016 last week and remains almost three cents off its three year high of US$1.2538 hit in January.

The moves in foreign exchange markets were far more muted than in other asset classes last week, but analysts said volatility had risen.

Commerzbank said worries about US inflation returning were reflected in rising exchange rate volatilities options markets. REUTERS