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BUZZ-COMMENT-US recap: Euro gains vs dollar despite doubts regarding EU rescue fund

Credit: REUTERS/Thomas White

Reports from the EU summit suggesting wide divides persist in plans for a pandemic rescue fund [nL5N2EO1NT] haven’t soured market appetite for selling the dollar against the euro in part because the ECB is seen keeping the cost of funding for hardest hit economies low. This as the salient 10-year BTP-Bund yield spreads slipped today to their lowest since March.

July 17 (Reuters) - Reports from the EU summit suggesting wide divides persist in plans for a pandemic rescue fund haven’t soured market appetite for selling the dollar against the euro in part because the ECB is seen keeping the cost of funding for hardest hit economies low. This as the salient 10-year BTP-Bund yield spreads slipped today to their lowest since March.

Some, and even key EU leaders such as Merkel, have touted reaching a rescue fund deal as crucial for cohesion. However, a familiar outcome of prior EU crises has been a tendency for material changes only after financial markets signaled imminent disaster.

EUR/USD gains have also just been part and parcel with broader and ongoing dollar weakness associated with rising asset prices. Convergence of monetary policy to easing extremes creates the TINA quandary between owning negatively real or nominal yielding “havens”, namely in dollars, as well as riskier assets .

That said, the dollar index is getting closer to its pandemic lows as the negatively correlated S&Ps also have a relatively modest amount of room to rally before running into pre-pandemic record highs . The first test of how much more risk can rise at the dollar’s expense is the EUR/USD’s 1.618 Fibo projection off the April-May base, and March’s high, at 1.1491/95.

Adding to concerns about the dollar are repeated record new US COVID-19 cases and attendant restrictions. Friday’s housing and consumer sentiment data tended to reinforce apprehension regarding the shape of the recovery .

Ten-year Treasury yields bounced back from a tiny breach of 60bps as stocks recovered off lows. US mortgage rates made a new record low below 3% helping to partly offset rising housing prices.

USD/JPY is drifting away from Thursday’s failed attempt to take out Tuesday’s 107.42 swing high and in line with seemingly indomitable TINA-driven risk-on flows weighing on the dollar with a haven-yen chaser. But prices need a weekly close below the weekly kijun at 106.70, or above the tenkan at 107.96, to exit the recent consolidation.

GBP/USD dipped toward the week’s low before recovering in line with fresh dollar weakness, strengthening stocks, and a pullback in EUR/GBP from fresh July highs.

The haven franc was a top performer, partly as a hedge against the EU summit ending poorly. And EUR/CHF’s recovery from July’s lows, likely with a hand from the SNB, created some space for the franc to appreciate without triggering fresh intervention.

Commodity and emerging markets currencies were a mixed bag, as were commodity prices.

After the EU summit, which may go deep into the weekend, the focus will shift back to US congressional negotiations regarding pandemic backstopping, the bulk of which will end later this month and may add to economic risk from record covid cases. Some focus will also remain on rising tensions with China.

July Markit PMIs on Friday is near the top of the list of scheduled releases next week.

For more click on FXBUZ

(Editing by Terence Gabriel Randolph Donney is a Reuters market analyst. The views expressed are his own.)

((Randolph.Donney@thomsonreuters.com))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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