Rising yields boost
dollar, euro after French vote
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[May 09, 2017]
By Patrick Graham
LONDON
(Reuters) - Currency markets swung back to bets on improving growth and
tighter monetary policy on Tuesday, lifting the dollar and euro against
traditional safe havens for capital including the yen and the Swiss
franc.
Emmanuel Macron's election as French president on Sunday turned
attention away from the political concerns on both sides of the Atlantic
that have dominated currency markets this year, and U.S. and European
yields were broadly higher in morning trade.
The interest rate premium investors get for holding dollar 10-year
government bonds instead of their yen equivalents rose to its highest
since the end of March overnight and German Bund yields were also
higher.
"We are going back to trading diverging monetary policy," said
Athanasios Vamvakidis, head of G10 currency strategy at Bank of America
Merrill Lynch in London.
"The market has priced in a 75 to 80 percent chance of a U.S. rate hike
in June. At the same time the market expects that the (European Central
Bank) will start tapering later this year. So both the euro and dollar
should do well against the yen."
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The dollar gained half a percent to 113.80 yen <JPY=> and the euro
around a quarter of a percent to 123.99 yen.
The Swiss franc, another currency with firmly negative interest rates as
well as a central bank actively seeking to weaken it with market
intervention, fell to its lowest against the euro since mid-October. It
is down just over 2 percent against the euro in the past fortnight,
compared to an almost 3 percent fall in the dollar.
With the pricing for a U.S. Federal Reserve rate rise in June about as
firm as markets tend to get ahead of the event itself, it was a bounce
for the dollar that dominated morning trade in Europe.
The euro dipped back below $1.09, down more than a cent down from
6-month highs hit after Macron's victory on Sunday.
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U.S. dollar note and a Euro coin are seen in this November 7, 2016
picture illustration. Picture taken November 7. REUTERS/Dado Ruvic/Illustration
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The
Australian dollar sank more than half a percent after another batch of soft
retail sales numbers pointed to more weakness in a domestic economy struggling
to find a solid basis for growth.
"From here you have to balance two competing factors: the outlook in Europe
looks good and that is encouraging investors who had held off previously to buy
European equities on an unhedged basis," said Roger Hallam, Chief Investment
Officer for currencies at JP Morgan Asset Management in London.
"The flip side is that relative yield developments do not point to a stronger
euro (against the dollar). It actually looks expensive here."
Still, the euro zone's GDP growth in the first quarter, due next week, is
expected to have outpaced anemic 0.7 percent growth in the United States in the
same period. Inflation jumped back to 1.9 percent in April.
ECB board member Yves Mersch said on Monday that the central bank is close to
replacing its negative view with a neutral one on whether the euro zone economy
will reach growth targets, and should adjust its policy guidance accordingly.
ECB chief Mario Draghi is due to speak to the Dutch parliament on Wednesday.
(Additional reporting by Hideyuki Sano in TOKYO; Editing by Mark Trevelyan)
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