Euro steadies as US dollar rally takes a breather

London

THE euro steadied on Wednesday near US$1.15, moving away from seven-week lows after a fall in US Treasury yields took some steam out of the US dollar's recent run.

Rising Treasury yields and concern about the sustainability of Italy's public finances have fuelled another rally in the US dollar in recent sessions, sending the greenback to a 11/2-month high on Tuesday. That rally paused in European trading on Wednesday, although analysts said it was likely to prove a temporary reprieve for the euro.

Investors are betting that rising inflation pressures will keep the Federal Reserve, which unlike the European Central Bank is hiking rates, firmly focused on tighter policy, even as US President Donald Trump took aim at policy makers' hawkish inclinations.

"If US yields rise at the same time and the market prices in a slightly more aggressive Fed next year, that automatically means that EUR/USD will head south," Commerzbank analyst Antje Praefcke said. "That means that short-term the US dollar will continue to remain bid. The euro has lost its shine and therefore has too little to offer at present."

On Wednesday, the US dollar index was largely unchanged at 95.713, not far off 96.163 reached during the previous session - its highest level since Aug 20. The euro hovered around US$1.1497 having briefly pushed past US$1.15 in Asian trading hours.

Yields on Italy's 10-year bonds have hit a 4 1/2-year high this week - reflecting concern about the country's finances. Italian Economy Minister Giovanni Tria reiterated on Wednesday that the government would do everything in its power to regain the confidence of financial markets.

European shares fell with investors in a nervous mood. Markets have been buffeted by worries about the impact of the US-China trade conflict on economic growth, and rising US funding costs.

"A short-term risk rebound should be faded and used to get back into JPY longs as rising bond yields will sooner or later collide with the outlook for risky assets," Morgan Stanley analysts said. The Japanese yen remains near 11-month lows. Against the yen, the US dollar edged higher, trading up 0.2 per cent at 113.20 yen.

With risk sentiment souring, currencies deemed a play on the global economy underperformed. The Australian dollar was stuck at US$0.7106, not far from its weakest since February 2016. Sterling hit a 3 1/2-month high versus the euro. REUTERS