LDN - Business

Euro trades above three-month lows, dollar awaits Fed

[July 07, 2021] By Ritvik Carvalho

LONDON (Reuters) - The euro traded near a three-month low against the dollar on Wednesday after German data raised doubts about the strength of the economic recovery, while the U.S. currency awaited the minutes from the last Federal Reserve policy meeting.

The European single currency changed hands at $1.1820, having touched a three-month low of $1.1806 on Tuesday. Against the yen, it fell to 130.81 yen, edging near its two-month low of 130.05 set on June 21.

Investor sentiment in Germany, the euro zone's biggest economy, fell sharply in July, though it remained at a very high level, the ZEW economic research institute reported.

Separate data showed orders for German-made goods posted their sharpest slump in May since the first lockdown in 2020, hurt by weaker demand from countries outside the euro zone.

Other risk-sensitive currencies took a hit after oil prices plunged as OPEC producers cancelled a meeting when major players were unable to come to an agreement to increase supply. [O/R]

The Australian dollar traded 0.3% higher at $0.7514, stabilizing after a bounce on Tuesday when the Reserve Bank of Australia took a first step towards stimulus tapering.

The RBA announced a third round of its quantitative easing programme, albeit at a size smaller size than the previous two rounds, while retaining the April 2024 bond for its three-year yield target of 0.1%.

The Japanese yen traded 0.1% lower at 110.73 yen per dollar, still holding on to gains from its 15-month low of 111.64 touched last week.

The yen's gains came as U.S. bond yields fell to their lowest levels since February after data signalled the service sector expanded at a slower pace.

Yields have fallen in recent weeks as many speculators who had bet that rising inflation could prompt the Fed to tighten its policy soon have been forced to bail out of their positions.

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An employee counts U.S. dollar bills at a money exchange in central Cairo, Egypt, March 20, 2019. REUTERS/Mohamed Abd El Ghany/File Photo

The dollar index, which measures the greenback against a basket of peer currencies, traded flat on the day, at 92.550, consolidating near its recent 3-month high.

"The main reason to be wary about the dollar’s prospects is the same reason that prompted the Fed’s change of tone: inflation," said Kevin Lester, CEO of Validus Risk Management.

"U.S. inflation is running far hotter than in most other developed markets, pushing U.S. real inflation-adjusted yields far below those in the eurozone. In simple terms, this makes it less attractive to hold U.S. dollar assets despite the nominal yield advantage."

Minutes from the Fed's June policy meeting due later on Wednesday, could offer fresh hints on the central bank's policy outlook.

"Investors will want to learn more about the likely timing of any QE taper and any evidence that the officials engaged in concrete discussions of the pace and timing of a potential stimulus reduction can be seen as a hawkish surprise," Valentin Marinov, head of G10 FX research at Credit Agricole, said.

"Secondly, the FX investors will focus on any discussions of an even earlier rate lift-off, with the rates markets already attaching close to 90% probability to three Fed rate hikes in the next two years," Marinov added.

Elsewhere, cryptocurrencies were in a holding pattern, with bitcoin little changed at $34,643 and ether at $2,372.

(Reporting by Ritvik Carvalho; additional reporting by Hideyuki Sano in Tokyo; editing by Alexander Smith and Hugh Lawson)

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