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Euro falls to nine-month dollar low

Wednesday, August 06 13:42:59

The euro fell to a nine-month low against the dollar today as Italy reported it had fallen back into recession in the second quarter.

German data also showed industrial performance slumped in June and concern grew over conflict in Ukraine.

The dollar rose to an 11-month high against a basket of major currencies, boosted by a move by investors away from currencies seen as higher-risk, amid reports Russian troops had gathered on the Ukrainian border.

Around 20,000 Russian troops massed on Ukraine's eastern frontier were creating a "dangerous situation", NATO said on Wednesday. It warned that Moscow could use humanitarian concerns as a pretext to send troops across the border.

That, as well as the data showing Italy's economy unexpectedly shrank in the second quarter, drove the euro as low as $1.3333, its lowest since early November.

"It's difficult for some investors to be short Russia, because of liquidity reasons, which effectively encourages proxy selling of euros as concerns grow about a further escalation of those tensions between the West and Russia," said Valentin Marinov, head of European G10 currency strategy at Citigroup.

"All of this is adding to the headwinds of an already weak recovery in the euro zone, encouraging bets on more aggressive European Central Bank easing, weighing on the euro."

German industrial orders fell at their steepest rate in almost three years in June. One reason seemed to be companies becoming more cautious about taking on contracts as geopolitical tension escalated. Another was weaker euro zone demand.

"Germany is very heavily linked to Russia on a trade basis, so given the trade sanctions that are now being put in place, Germany is going to be one of the countries that is hardest hit by that," said Ian Stannard, head of European currency strategy at Morgan Stanley in London.

"If we're in a position where activity data was softening already, and that's likely to be hit further by sanctions, that's going to leave the euro in quite a vulnerable position from here."

Long considered thought to be underperforming, the dollar has gained more than two percent against a basket of major currencies since early July. It climbed to an 11-month peak of 81.716 on Wednesday.

Data on Tuesday showed U.S. services sector activity reached an 8 1/2-year high last month and factory orders surged in June, bolstering expectations of solid economic growth in the third quarter.

"We're back into the medium-term trend, which is for a higher dollar," said Jesper Bargmann, head of trading for Nordea Bank in Singapore.

Sterling slipped after the UK reported that industrial and manufacturing output grew less than expected in June, cooling expectations that the Bank of England will raise interest rates this year.

The pound slid to a day's low of $1.6821 before recovering slightly to $1.6830, down a third of a percent.

A two-day meeting of the BoE's rate-setting Monetary Policy Committee begins on Wednesday. Markets will have to wait until later in the month to see whether any of the committee's nine members now favour a rise in rates. (Reuters)

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