Euro slides to lowest since 2017 against greenback

London

THE euro plunged to a 28-month low against the US dollar on Tuesday as investors priced in deeper negative interest rates for longer in the eurozone.

The common currency's drop also came on the back of a strengthening dollar as the trade spat between Washington and Beijing intensified and traders turned to buying US assets as safe-haven investments without hedging their dollar currency exposure, analysts said.

Money markets have increased to more than 80 per cent the probability that the European Central Bank (ECB) will cut its benchmark rate by 20 basis points when it meets next week. The ECB benchmark rate now stands at minus 0.40 per cent and it has all but promised a monetary policy stimulus package as growth falters.

Monday's PMI survey showed European manufacturing contracted for seven straight months. The euro was last down by 0.3 per cent at US$1.0936. It fell to US$1.0926 earlier, its lowest since mid-May 2017. A break below the key US$1.1000 level last week had sparked heavier sell-offs.

Against an index of its six major rivals, the dollar rose to 99.37 on Tuesday, the highest since mid-May 2017, as investors became more gloomy about the global economy's prospects amid the US-China trade dispute. Bloomberg News reported that Chinese and US officials are struggling to agree to a schedule for a round of trade negotiations that had been expected this month.

Overseas investors dived into buying US Treasuries. The 10-year Treasury bond yield fell 2.5 basis points to 1.48 per cent on Tuesday.

The flows have boosted the dollar, but investors' decision to either buy Treasuries unhedged, or trim some of their currency hedges has intensified the gains in the greenback, said Richard Falkenhall, senior forex strategist at SEB.

The euro could get some relief if the 5-Star Movement and the Democratic Party form a coalition government in Italy, analysts said.

Elsewhere, the pound fell to its lowest in nearly three years on Tuesday as British lawmakers prepared to vote on the first stage of their plan to block Prime Minister Boris Johnson from pursuing a no-deal Brexit.

Sterling was last down 0.4 per cent at US$1.2012 after falling to US$1.1959, the lowest since October 2016, when it plunged to US$1.1491 in a flash crash.

Against the euro, sterling touched a two-week low of 91.47 pence. REUTERS