Euro set for worst week since 2016 as dollar extends
rally
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[February 09, 2018]
By Tommy Wilkes
LONDON (Reuters) - The dollar rose on
Friday to extend its recent gains while the euro was headed for its
worst weekly performance since Nov. 2016 after the global stock market
sell-off squeezed investors positioned for a weaker greenback.
Betting on a weaker dollar versus the euro has been one of the most
popular trades this year, with a resurgent European economy fuelling
expectations the European Central Bank will shrink its balance sheet
sooner than expected.
After earlier rising, the euro slipped and was down 0.1 percent at
$1.2234 at 1215 GMT, bringing weekly losses to 1.7 percent. So far this
year, the euro remains 2 percent higher. It hit a three-year high of
$1.2538 in late January.
More broadly, the dollar against a basket of currencies was up 0.3
percent and has now gained 1.4 percent <.DOXY> this week, the best
performance since November 2016. The U.S. currency remains down 1.8
percent this year, however.

Stephen Gallo, European Head of FX Strategy at BMO Capital Markets, said
the sell-off "in equity markets and risk assets has led to a healthy
correction in FX markets, in the short dollar positions getting
squeezed."
Gallo said that unless there was a fundamental shift in the health of
the global economy, which this week's downturn in equity markets did not
imply, the dollar remained in a "multi-year downward trend.
"Don't let this take your eye off the longer-term picture of dollar
weakness," he said.
The dollar recovered some ground against the yen in early European
trading after earlier falling to near four-month lows <JPY=> as
investors sought out safety in the Japanese currency.
The slump in stock prices continued in Asia and Europe on Friday.
The U.S. House of Representatives joined the Senate in approving a bill
to end an overnight federal shutdown, averting serious interruption of
the government's business that could have hit sentiment towards the
dollar.
REDUCING RISK
Before this week's market mayhem, one of the most popular trades in the
currency market was to buy the euro on expectations of unwinding of
stimulus by the ECB and to sell the yen on the view that the Bank of
Japan will be the last to exit from its ultra-loose policy.
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U.S. Dollar and Euro
notes are seen in this June 22, 2017 illustration photo.
REUTERS/Thomas White/Illustration/File Photo

Many market players are closing existing positions rather than making new bets
as they look to reduce risk exposure during the pick up in volatility.
Equity market volatility has surged this week, and while foreign exchange
markets have remained far calmer, the carnage this week has upended some popular
trades.
UniCredit said it was closing a short position in the euro versus the Norwegian
krone after the sell-off penalized the previously buoyant currency and Norwegian
price growth in January came in weaker than expected.
"We remain constructive on the Norwegian krone given its still-huge
undervaluation according to our models...but will probably wait for more
evidence of rising inflation at home and more-stable markets before proposing
this trade again," UniCredit strategists said in a note.
The euro was up 1.3 percent at 9.8275 <EURNOK=> after the krone earlier weakened
to its lowest level since December.
Emerging market currencies as well as commodity-linked currencies like the
Canadian <CAD=> and Australian <AUD=> dollars, which have enjoyed a strong run
against the U.S. currency, have also been hit by this week's turmoil.
The Swiss franc <EURCHF=>, another currency investors turn to as a perceived
safe haven, hit a near four-month high against the euro at 1.1460 francs before
falling back to trade at 1.1475.

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thomsonreuters.biz/cms/?pageId=livemarkets
(Editing by Peter Graff)
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