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Sterling buffeted by Brexit headlines and retail data

London

THE euro held near a six-week high on Wednesday as investors turned more optimistic about the outlook for global markets in the second quarter, with relatively higher-yielding currencies such as the Australian dollar well supported.

Carry trades were back in favour as traders renewed their appetite for leveraged bets via borrowing in low yielding currencies such as the Japanese yen and the Swiss franc as global stock markets showed signs of stabilising.

"The euro made a decent run higher but that may have made it more sensitive - and a little bit over extended - so the ECB comments were perhaps an excuse to rectify that and take some profits," said Jane Foley, FX strategist at Rabobank in London.

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On Tuesday, European Central Bank policymaker Ewald Nowotny said the bank would probably decide this summer to slash its bond purchases, warning the ECB must not fall "behind the curve".

The ECB said this month it could still extend its 2.55 trillion euro (S$4.13 trillion) bond purchase scheme beyond September if needed. But it skipped a reference to potentially increasing purchases, a signal that it remains on track to end the three-year-old stimulus scheme before the end of 2018.

The euro hit a fresh two-month high against the Swiss franc at 1.1795 francs per euro and was up half a per cent on the day. The single currency also chalked up gains against Scandinavian rivals, but was broadly flat against the dollar at US$1.2393.

The yen came under some selling pressure, with the dollar rising more than half a per cent against the yen to 105.92 yen, with Morgan Stanley strategists saying the yen could come under more selling pressure. "With bond volatility falling as Japan starts its new fiscal year in April, Japanese investors' appetite for long-term foreign bond investments should rebound temporarily," they wrote in a daily note.

Elsewhere, the dollar edged higher on hopes that negotiations between the US and China would produce a compromise and avoid a full-blown trade war.

But news that US President Donald Trump and German Chancellor Angela Merkel had discussed "joining forces to counter" China's economic practices and alleged intellectual property theft raised fears that trade tensions could escalate.

The US currency was 0.2 per cent higher against a broad basket of its rivals at 89.50 and less than 2 per cent below a six-week high of 90.93 hit in early March.

Elsewhere, sterling was buffeted by cross winds as optimism about media reports that Britain will propose a new solution for the Irish border dispute holding up Brexit talks was offset by some disappointment over retail sales data. REUTERS