Euro hit by concerns over tougher Russia sanctions, diverging rate outlook

imageLONDON: The euro hit an eight-month low against the dollar on Wednesday as worries over tougher sanctions on Russia and their potential impact on fragile euro zone growth drove investors away from the single currency.

The euro also fell against sterling, which was supported ahead of the latest minutes from the Bank of England’s Monetary Policy Committee, due at 0830 GMT. Markets will be looking for any signs of when an interest rate hike might come, with any move to a more hawkish tone likely to boost sterling further.

The Australian dollar rose over half a percent against the U.S. dollar, boosted by a higher-than-expected reading of a key gauge of underlying inflation in June, denting market speculation of future rate cuts.

The euro’s weakness was broad-based, dropping to its lowest in nearly two years against the British pound. The single currency fell to 78.83 pence, its lowest since August 2012.

Against the dollar, the euro fell to $ 1.3455, its lowest since November 2013, with investors eying more losses in coming days. The euro was down 0.2 percent against the yen at 136.45 yen, trading near its lowest in more than five months.

“There is quite broad-based pressure building on the euro and there are a number of factors driving that. Europe is directly exposed to Russia by trade – Germany in particular – so sanctions could potentially have a negative impact on the euro,” said Ian Stannard, a currency strategist at Morgan Stanley.

Stannard also said that comments overnight from Chinese officials, suggesting there have been capital outflows from China, would imply that China’s reserve accumulation is slowing, reducing the need for the purchase of alternative reserve currencies, of which the euro has been a main beneficiary.

Traders said it was significant that the euro had closed below $ 1.35 on Tuesday for the first time this year, making the currency appear technically weak. It could fall below reported option barriers at $ 1.34 in the coming days if flash PMI and German IFO data disappoint, they said.


The dollar index, which tracks the greenback against a basket of six major rivals, was steady on the day at 80.781, not far from a Tuesday high of 80.837 touched on expectations that higher U.S. interest rates are on the horizon.

Data issued on Tuesday showed U.S. inflation was 0.3 percent in June, in line with most analysts’ forecasts, though core inflation, excluding volatile food and energy prices, was just 0.1 percent, about half of what analysts had forecast.

Despite the weaker-than-expected core inflation reading, markets still expect the U.S. Federal Reserve to continue tapering its bond purchase programme and then raise interest rates in the latter half of 2015.

“The U.S. will raise next year, while in Europe, by contrast, we might see more easing steps,” Ayako Sera, senior market economist at Sumitomo Mitsui Trust Bank in Tokyo.

The premium offered by two-year U.S. Treasuries over German debt has widened to around 46 basis points, levels not seen since 2007.

The Australian dollar added about 0.6 percent to buy $ 0.9446 , after spiking to a nearly two-week high of $ 0.9439 on the surprisingly high core inflation figures.

Copyright Reuters, 2014

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