Euro's advance slows as risk sentiment falters

London

THE euro retreated on Thursday after a two-month rally against the US dollar, as Germany reported disappointing economic output for the second quarter and the Federal Reserve maintained its support for the US economy.

The euro was set to end July with its best monthly gain in a decade, a 4.7 per cent jump, but a shift in the bullish mood is threatening the milestone.

The euro lost about 0.34 per cent to US$1.1752, as the continent's stock markets fell after disappointing second-quarter earnings weighed on morale.

"The change in risk sentiment this morning has prompted some traders to buy the greenback as it has been a safe-haven play recently", wrote David Madden, an analyst at CMC Markets. "The euro came under more pressure on the back of the German flash GDP reading."

The German economy contracted by a worse-than-expected 10.1 per cent in the second quarter, its steepest plunge on record, as household spending, business investment and exports collapsed during the Covid-19 pandemic.

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"Now it's official, it's the recession of a century," said DekaBank economist Andreas Scheuerle. The country's statistics office said the plunge was the worst since 1970.

Other European Union (EU) indicators were more encouraging. Eurozone economic sentiment, for example, rebounded more than expected in July. Industry gained, although it became more gloomy.

Many traders, however, believe that the euro is on a structural long-term trend against the US dollar, after EU leaders agreed on a massive recovery fund that will bring the bloc closer to a fiscal union.

The target of US$1.20 for the euro is a popular one among foreign exchange strategists, and demand for options that would benefit from such a rise shows bulls have not given up on more gains.

The fact that Fed chair Jerome Powell did not shift his position to a more dovish one and called for more fiscal support to prop up the economy also helped the US dollar.

In Asia, the yen dipped 0.2 per cent to 105.10 per US dollar.

Tensions with China dragged on risk, adding to pressure on the Antipodean currencies.

The Australian dollar was down 0.55 per cent at US$0.7148 and the kiwi slipped 0.57 per cent to US$0.6631.

Sino-US relations have deteriorated over issues ranging from the pandemic to Beijing's territorial claims in the South China Sea and its clampdown on Hong Kong. REUTERS