Euro slides to 16-month lows on gloomy outlook

London

THE euro plunged to a 16-month low on Monday as the impact of Washington and Beijing's trade war on the European economy dominated investor sentiment.

Germany's export-dependent manufacturing sector remained in contraction in August as weaker demand pushed companies to scale back production and cut jobs. With its sales abroad hit by a worsening trade climate, a global economic slowdown and an increasingly chaotic run-up to Brexit, most of Germany's growth momentum and consequently Europe's growth outlook has cratered.

The United States began imposing 15 per cent tariffs on a variety of Chinese goods on Sunday while China started putting new duties on US crude oil.

The euro was 0.3 per cent lower versus the US dollar at US$1.0958 after falling below US$1.10 on Friday for the first time since May 2017. The euro's more than 4 per cent slide this year is a big reversal in fortunes for the single currency after European Central Bank (ECB) chief Mario Draghi first indicated a likely pullback in its extraordinary stimulus policies in a speech in Sintra in June 2017.

But since then an escalation in trade tensions between the US and China, plus a growing swathe of government bond yields sinking into negative territory thanks to a worsening economic outlook, has sapped demand for the euro.

Money markets were assigning a bigger probability of a 20 basis point rate cut on Monday by the ECB this month. Though latest futures data indicated that net hedge fund positions in the single currency are broadly at neutral levels, they are quite some way from record high levels seen last year.

With US markets shut for a holiday on Monday, though, investors remained on the sidelines while looking to see what expansionary policies the ECB and the US Federal Reserve could unveil this month.

The Chinese yuan was fragile after registering its biggest monthly slide in 25 years in August as the trade tensions intensified. Broader market sentiment remained on the back foot too with net positions in the Japanese yen creeping up to its highest levels in nearly three years.

Elsewhere, the dollar index which measures the greenback's performance against a basket of six major currencies was broadly steady at 98.87. REUTERS