Euro extends gains as dollar rally loses steam

Reuters

Published May 14, 2018 04:06AM ET

Euro extends gains as dollar rally loses steam

By Tom Finn

LONDON (Reuters) - The euro headed for a third successive day of gains on Monday as a weak dollar helped the single currency recoup losses, as investors kept a wary eye on political events in Italy.

Italy's anti-establishment 5-Star Movement and the far-right League, both hostile to EU budget rules, spent the weekend in talks to forge a common policy program. The parties were adversaries as recently as March but now look likely to form Italy's next government.

The euro (EUR=) was 0.3 percent higher at $1.1972, having fallen last week to $1.1823, its weakest since Dec. 22.

"Italian politics aren't a major moving factor in the euro zone yet. It's not an existential threat and isn't driving a lot of positioning or putting the euro's bounce at risk," said Manuel Oliveri, an FX strategist at Credit Agricole (PA:CAGR) in London.

"I expect inflation will rebound in the euro zone and that will keep the European Central Bank's stimulus unwinding on track."

The dollar retreated further from a 2018 peak hit last week as traders booked gains on its recent run-up, spurred by the widening interest rate gaps in favor of the United States.

The dollar index against a basket of six major currencies (DXY) was down 0.1 percent at 92.515.

Bank of America Merrill Lynch (NYSE:BAC) strategists said the main catalyst for the dollar's surge was the lack of improvement in euro zone economic data, prompting investors to unwind record short-dollar bets, particularly against emerging market currencies.

A loss of economic momentum in Europe has made policymakers in Europe and Britain more cautious about ending financial crisis-era policies.

On Friday, ECB President Mario Draghi said the euro zone needed a new "fiscal instrument" to help weaker member nations if they were being overly penalized by investors during a debt crisis.

Traders pushed out expectations of a rate hike in Britain to end-2018, and the European Central Bank boosting interest rates to the second half of 2019.

Analysts at ACLS said they expected a reduction in trade tensions between the U.S. and China this week to fuel risk-on sentiment that would be positive for the Australian dollar and negative for the yen, considered a safe-haven currency.

The Australian dollar was 0.2 percent higher at $0.7558 AUD=D4 after rallying back from an 11-month low of $0.7413 plumbed on Wednesday.