Euro up on China support as dollar surge loses momentum

LONDON - 24 May 2018: The euro rose off a six-month low on Thursday as China signaled its confidence in the single currency but concerns over an economic slowdown in Europe and political risks in Italy continued to act as a brake.

The euro is set to slump for a sixth consecutive week against the dollar — the longest weekly losing streak since January 2015 — hobbled by worries over a deepening economic slowdown in the currency bloc.

On Thursday China’s Premier Li Keqiang said China was a long-term and responsible investor in the euro and hoped the currency would be strong and steady in spite of the occasional sovereign debt crisis in Europe.

The euro bounced back slightly to $1.1725 EUR=EBS after hitting a six-month low of $1.1676 on Wednesday but gains were capped by economic and political worries in Europe.

Italian President Sergio Mattarella on Wednesday gave political novice Giuseppe Conte a mandate to lead the first government in Italy made up of anti-establishment parties that have vowed to shake up the European Union.

The euro has unwound all of its rally against the Swiss franc since the Italian elections as the prospect of a spendthrift coalition government taking shape in Rome unnerves investors.

It fell to near three-month lows against the franc on Wednesday as fresh data indicated a slowdown in European business activity and cast a shadow over the timing of the central bank’s rate hike.

“It appears that the slowdown that we saw in Q1 across Europe may well be showing signs of spilling over into Q2 and may be symptomatic of a broader economic malaise,” said CMC Markets’ chief analyst Michael Hewson.

The dollar lost momentum after President Donald Trump threatened to impose new tariffs on imported cars and dovish-looking minutes of the Federal Reserve’s last policy meeting.

While most policymakers thought it likely another interest rate increase would be warranted - in line with market expectations - the minutes showed the Fed would tolerate inflation rising above its goal for a time.

The dollar’s fall appeared to accelerate as Trump opened a new front in the trade war by considering new tariffs, this time on cars, just days after Washington agreed with China to put “on hold” its plan to impose tariffs on $150 billion worth Chinese goods.

But analysts cautioned against reading too much into the impact of trade policies on the greenback.

“Recent history has shown that the impact of US protectionist policies on FX markets has been fairly ambiguous – but we note that speculation tends to be dollar negative as the currency prices in some notion of a protectionist risk premium,” ING FX analyst Viraj Patel, said in a note.