Euro strengthens on trade, growth prospects

London

THE euro hit a four-and-a-half-month high on Monday as optimism over US-China trade relations and the global growth outlook knocked demand for US dollars.

Thin end-of-year volumes exacerbated the broad weakness in the US currency, which dipped for three straight sessions and last Friday suffered its biggest one-day fall since June.

Improving investor sentiment, which has discouraged buying of the US dollar as a safe haven, was further boosted when China's central bank unveiled a measure to help lower borrowing costs and boost economic growth. Investors also cheered a report forecasting an 8 per cent rise in China's 2019 retail sales.

The euro climbed as high as US$1.1211, its strongest level since Aug 13, before settling at US$1.1192, up 0.2 per cent on the day.

Signs that the eurozone economy has turned a corner have lifted the EU single currency in recent weeks.

The US dollar index, which measures the currency against a basket of rivals, weakened 0.1 per cent to 96.826. With Friday's loss, the index's gains for the year have shrunk to around 0.7 per cent - the weakest annual rise for the US dollar since 2013.

"The main drivers of the weaker dollar have likely been risk appetite holding up in the wake of comments from the US pertaining to a Phase 1 trade deal recently, as well as the US Federal Reserve's continued repo operations, which have recently been undersubscribed," MUFG analysts said.

The greenback lost 0.3 per cent versus the Japanese yen, to 109.17 yen. Sterling climbed to as high as US$1.3134, 0.4 per cent higher.

Against the euro, the pound recovered earlier losses and was last up 0.2 per cent at 85.24 pence. Concerns that Britain is headed for a disruptive "hard Brexit" at the end of 2020 had been hurting the pound since mid-December.

Marshall Gittler, chief strategist at ACLS Global, said it was noticeable how little currencies had moved during 2019, with very low volatility and narrow trading ranges, which he put down to "economic and monetary policy convergence". "I expect less of both in 2020, for two reasons," he said, noting the expected end of the Sino-US trade war, which should lead to broader economic recovery across the world. The second reason, he added, was that inflation seemed to have bottomed out and "conceivably some countries could start thinking about hiking rates, which would encourage monetary policy divergence". REUTERS