Euro hits fresh 5-month high vs yen, but pauses rally against dollar

Reuters Tokyo/Sydney | Updated on January 24, 2018 Published on June 04, 2015

The euro’s rally against the dollar took a breather on Thursday but it touched a fresh five-month high against the yen, after the head of the European Central Bank played down the impact of higher market rates and triggered a spike in German yields.

Cautious optimism that cash-strapped Greece was not about to default on its debt also helped the common currency.

Greece debt deal

Emerging from late-night talks with senior EU officials, Greek Prime Minister Alexis Tsipras declared that Greece was close to a deal with its creditors and that Athens would make a payment due to the IMF on Friday.

US jobs report

Also in focus on Friday, the US non-farm payrolls report will provide another gauge of the strength of employment conditions and clues to the possible timing of the US Federal Reserve’s next interest rate hike. The report is expected to show 225,000 jobs created in May, according to a Reuters’ poll of economists.

“As per usual, the pre-payrolls price action is pretty quiet, and we can expect more of the same, not withstanding any major developments on the Greek front,’’ said Sue Trinh, senior currency strategist at RBC Capital Markets in Hong Kong.

“Greek headline risk remains acute in the market. It’s really lying in wait for any further developments on that front, though most of the headlines we’ve had in the last 24 hours look rather conciliatory and it suggests that a positive outcome is likely.’’

Euro vs dollar

The euro climbed as far as $1.1285 on Wednesday, reaching its highest since May 19. It rose 3-1/2 US cents over two short days, which was its biggest gain since January 2011. It was last slightly lower on the day at $1.1267.

Against the yen, the euro’s uptrend remained intact, and it powered to 140.37, its loftiest level since January 13. It was last up about 0.2 per cent on the day at 140.31 yen, well above last week’s trough of 133.10.

German Bund yields

The euro’s rally coincided with a sharp spike in German Bund yields. The benchmark 10-year yield soared 34.7 basis points on Tuesday and Wednesday — a magnitude not seen since October 1998.

Higher German yields can make the euro less attractive as a funding currency for carry trades, in which investors borrow funds to invest in higher-yielding currencies. This compelled some investors to unwind bearish euro positions.

Markets appeared to have taken comments by ECB President Mario Draghi on Wednesday as a green light to continue selling Bunds. When asked about the surge in yields, Draghi said: “We should get used to periods of higher volatility.’’

He also indicated that the ECB would not add more stimulus just because of rising yields.

”Let me tell you that the Governing Council was unanimous in its assessment that we should look through these developments and maintain a steady monetary policy stance,’’ he told a media conference after the central bank's policy meeting.

Dollar index

The resurgent euro dragged down the dollar index, which slid to a near two-week low of 95.213 on Wednesday. It last stood at 95.375 in Asian trade, down about 0.1 per cent on the day.

The dollar firmed on the day against the yen, edging up about 0.2 per cent to 124.47, not far from a 12-1/2-year peak of 125.07 scaled on Tuesday.

The Australian dollar, which had been one of the best performers this week thanks to a confluence of local factors, skidded about 0.8 per cent to $0.7724, after downbeat data revived expectations that the Reserve Bank of Australia might ease further.

On Tuesday, the RBA had declined to offer a clear easing bias, disappointing Aussie bears who were further hit by data that showed the economy fared better than expected in the first quarter.

But Thursday’s data showed domestic retail sales data for April stalled and the nation’s trade deficit widened to a record of A$3.9 billion.

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Published on June 04, 2015
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