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Euro hovers near 4-month trough

Thursday, June 12 08:14:00

The euro hovered near a four-month low versus the dollar on Thursday, hobbled by a widening yield gap between euro zone bonds and their major peers, while the New Zealand dollar rose after the central bank retained its hawkish bias.

The euro last traded at $1.3544, up 0.1 percent on the day but not far from a four-month low of $1.3503 set last Thursday when the European Central Bank cut interest rates to record lows and took its deposit rate negative for the first time.

After that low was hit, short-covering had lifted the euro to a two-week high near $1.3678 on Friday. But the euro has faced renewed selling pressure this week, both against the dollar as well as higher-yielding currencies.

One key to the euro's outlook is whether it will manage to breach support at levels around $1.3500, said Bart Wakabayashi, head of foreign exchange for State Street Global Markets in Tokyo.

"An important psychological level might be $1.3500. I think there will be some follow-through selling if that level is breached," Wakabayashi said.

"If there is a clear break of $1.3480, then we will probably start to hear some chatter about $1.3200," he said.

The euro had touched a low near $1.3477 in early February. A drop below that level would take the euro to its lowest level since last November.

According to Thomson Reuters data, the yield spread of two-year U.S. Treasury yields over two-year German government bond yields has risen to about 39 basis points this week, the fattest in seven years.

The common currency has also fallen on the crosses, as the ECB's easing measures have stirred talk that the euro could increasingly be used as a funding currency for carry trades, in which investors sell low-yielding currencies to fund investment in higher-yielding assets. (Reuters)