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Title: Safe-haven demand pins euro near a five-year low

Jul 04, 2022 05:16AM ET

By: AnalysisWatch

On Monday, the euro fell, staying near a five-year low against the US dollar, as investors sought safety in the greenback amid concerns about a slowdown in global growth.

The war in Ukraine and its economic fallout, in particular rising food and energy inflation, have been a major factor in the euro weakening more than 8% against the dollar this year.

The difference between the reactions of the European Central Bank and the US Federal Reserve to higher inflation has also weighed on the euro.

Data on Friday showed that inflation in the euro zone rose to another record, strengthening the ECB's case to raise interest rates this month.

Jeremy Stretch, head of G10 currency strategy at CIBC, said he expects headwinds for the euro to persist as the ECB will raise rates on July 21 "by just 25 basis points."

On Monday, the euro was unchanged at $1.0423, just above a five-year low of $1.0349 in May.

Fears of a global recession kept the dollar at high levels, although markets lowered expectations of a U.S. interest rate hike.

The market is pricing in about an 85 percent probability of another 75 basis point rate hike this month and for rates of 3.25 percent to 3.5 percent by the end of the year-before being cut in 2023.

The U.S. dollar index rose 0.1% to 105.140, not far from the two-year high of 105.790 reached last month.

Australian and other commodity currencies, and even the euro and sterling, are likely to fall further over the week, given that markets are now overly focused on the risk of a sharp slowdown in the global economy.

On Friday, sterling fell to a two-week low of US $1.1976 before closing at US $1.2110.

Looking ahead to the end of the week, investors await the release of the minutes from last month's Fed meeting on Wednesday and US employment data on Friday.

The Reserve Bank of Australia will meet on Tuesday and markets have priced in a 40 basis point rate hike.

Australia's currency may not get much of a boost if a hike of that size or thereabouts comes.

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