By Yadarisa Shabong
(Reuters) – The euro steadied after hitting a four-month high against the dollar on Thursday as traders brace for the European Central Bank’s rate decision and outlook against the backdrop of rising yields after Germany’s historic debt overhaul.
The euro was little changed after earlier scaling to $1.0822 for the first time since November 7.
The shared currency has gained 4% so far this week, set for its biggest weekly jump since March 2020.
A quarter-point rate cut is widely expected from the ECB’s policy decision later in the day. But the focus will be on the scope and pace of easing beyond that, and ECB President Christine Lagarde’s comments about the sharp rally in government debt yields.
“German yields have rallied, but so have French yields and Italian yields and France and Italy have their sustainability issues,” said Nick Rees, head of macro research at Monex Europe.
“Now at some point, that story comes back to the fore and markets start to worry about euro zone fragmentation and that really puts a cap on the level to which euro/dollar can rise.”
What Lagarde says about the ECB’s “willingness to step in and intervene if this becomes a risk of blowing something up” will be crucial, Rees said.
The dollar index, which measures the greenback against six peers, is on a four-day losing streak and wallowed at its lowest since November 6, when U.S. President Donald Trump won the election, as worries of a U.S. slowdown lingered amid trade tensions.
“It is hard to step into the bullish EUR momentum and call for a pause to the rally,” Barclays analysts said in a note.
“It is clear that in the case of a deepening US slowdown, ongoing good news from Europe and noisy US tariff policy could add fuel to the fire,” they added.
Trump’s administration, which has slapped tariffs on Canada, Mexico and China, gave a one-month reprieve on auto import levies to its nearest neighbours, again showing how rapidly the trade landscape can shift.
The U.S. currency rose 0.15% to C$1.4366 and was up 0.3% at 20.47 Mexican pesos.
“U.S. trade policy remains the biggest uncertainty for the markets,” said Kyle Rodda, senior financial markets analyst at Capital.com.
WORRIES OVER U.S. GROWTH
Rees said that the market is too worried about U.S. growth, when the “hard data” is not even out yet. U.S. nonfarm payrolls data is due to be released on Friday.
Barclays analysts said should U.S. data stabilise, “the bulk of the EUR rally” may be over.
The dollar fell 0.7% to 147.9 yen. Japan’s largest labour union group Rengo said on Thursday its member unions were seeking an average wage hike of 6.09% for this year.
“We do not expect any upswing in wage agreement to be substantially large enough to warrant an earlier rate hike by the Bank of Japan,” Goldman Sachs analysts said in a note.
The U.S. currency edged up 0.2% to 7.2345 yuan in the official market, but that was after falling 0.7% over the previous two sessions.
Beijing began its week-long annual parliamentary meeting of the National People’s Congress on Wednesday by signalling greater efforts to boost consumption to help protect economic growth at a time of heightened trade tensions with the United States.
The Swedish Crown strengthened on the dollar and euro after Sweden’s headline inflation surged, signalling an end to rate cut prospects in the near term.
The crown hit its highest since December 2022 at 10.994 per euro.
The British pound weakened against the euro as traders continued to pile on the common currency following Germany’s proposed fiscal stimulus.
(Reporting by Yadarisa Shabong and Kevin Buckland; Editing by Jacqueline Wong, Sonali Paul, Alex Richardson, William Maclean)
