Euro rallies on Franco-German proposal for recovery fund

London

THE euro rallied on Tuesday, propelled by a Franco-German proposal on Monday for a fund that would offer grants to European Union regions and sectors hit hardest by the novel coronavirus pandemic.

The common currency was also buoyed by weakness in the dollar, which lost its safe-haven appeal after encouraging results from the trial of a vaccine for Covid-19 boosted riskier assets.

Germany and France, whose agreements usually pave the way for broader EU deals, proposed that the European Commission borrow the 500 billion euros (S$775 billion) on behalf of the whole EU.

The Commission is expected to outline their proposal before a European summit scheduled for May 27.

The euro last bought US$1.0952 after rising to a two-week high of US$1.0976 earlier.

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And the cost of betting against the euro versus the dollar in currency-derivatives markets fell on Tuesday to the lowest since mid-March.

"The Franco-German proposal represents a material step forward towards harnessing joint fiscal capacity to provide sustained fiscal stimulus to support the economic recovery," said Lee Hardman, currency analyst at MUFG.

Still, with one-month and three-month risk reversals remaining below zero, traders were continuing to request a premium for euro put options, implying more bearish bets on the common currency.

Vasileios Gkionakis, global head of FX strategy at Lombard Odier, said that he would be surprised if investors were short the euro at current levels.

Speculators held US$10.6 billion of euro longs according to latest CFTC data, volumes close to two-year highs.

The euro was 0.3 per cent higher versus the Swiss franc at 1.0633, after rallying to an 11-week high the day before.

Gauges for overnight euro implied volatility rose to a three-week high of 9.10 per cent, suggesting that traders were expecting bigger-than-usual moves in the common currency on Tuesday.

The dollar was down 0.2 per cent against a basket of currencies at 99.42, having touched a two-week low of 99.22 earlier.

With governments scaling back lockdown restrictions, investors grew optimistic that economies could soon return to normal.

Trade-sensitive currencies such as the Australian dollar rose to a three-week high of US$0.6564. The New Zealand dollar was last up 0.7 per cent at US$0.6081.

The Swedish and Norwegian kroner rose by 0.6 per cent each to two-month highs. REUTERS