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The euro edged higher for a second consecutive day on Wednesday, recouping more than half of its losses sustained after the German coalition collapse as investors bought the single currency on expectations of strong economic growth.
With risk appetite firmly on the front foot, with world stocks perched at a record high and market gauges of volatility heading back towards record lows, even commodity-linked currencies, such as the New Zealand dollar, which have suffered a recent beating found some support.
“Regardless of what the German political outcome will be, the implementation of the economic policies will continue and investors are using this opportunity in the euro weakness to adjust some positions,” said Manuel Oliveri, an FX strategist at Credit Agricole in London.
The euro rose 0.25 per cent on Wednesday to $1.1769 against the dollar and not far away from a one-month high of $1.1862 hit last Wednesday.
The euro's gains were also bolstered by the general trend of dollar weakness across the board due to softening US yields.
Spreads between ten and two-year US Treasury bonds narrowed to 57.4 basis points in the previous session, its flattest level since late 2007 and was trading roughly half a basis point higher at around 58 basis points.
The dollar index against a basket of six major currencies was down 0.2 per cent at 93.77. The index fell back from a one-week high of 94.165 overnight after a rally triggered earlier this week by a sagging euro stalled as long-term US Treasury yields continued inching lower.
Fed minutes
With outgoing US Federal Reserve Chair Janet Yellen not offering any firm clues on where monetary policy in the world's biggest economy is headed, the dollar's near-term outlook remained uncertain.
Yellen stuck by her prediction that US inflation will soon rebound but offered on Tuesday an unusually strong caveat: she is “very uncertain” about this and is open to the possibility that prices could remain low for years to come.
“The monetary policy side of things is unlikely to provide any momentum for the dollar exchange rates until year-end," Commerzbank strategists said in a note.
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