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US Dollar Index : Euro's bounce fades as focus shifts back to economy, ECB policy

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02/18/2019 | 10:08pm EST
Wads of euro banknotes are stacked in a pile at the Money Service Austria company's headquarters in Vienna

TOKYO (Reuters) - The dollar was steady against its peers on Tuesday, lacking strong direction as U.S. markets were shut for a holiday the previous day, while the euro's latest bounce faded as the focus drifted back to the economy and European Central Bank policy.

The dollar index versus a basket of six major currencies was nearly flat at 96.881 after ending the previous session unchanged. U.S. financial markets were closed on Monday for Presidents' Day.

The euro was down 0.1 percent at $1.1298 . It edged up 0.16 percent overnight, pulling away from a three-month low of $1.1234.

The single currency had been buoyed by improved investor sentiment as expectations increased for an easing of the U.S.-China trade conflict after both sides reported progress in talks.

The dollar, the world's most liquid currency, has tended to perform well during bouts of investor nervousness.

"The euro's latest bounce was not based a positive incentive specific to the currency and the market will likely return to pricing in the potential negatives. The euro will remain on a shaky footing," said Masafumi Yamamoto, chief forex strategist at Mizuho Securities.

"There is still some way to go before potential negatives are factored into the euro ahead of the March 7 ECB meeting."

ECB policymakers will next meet on March 7, when the bank's staff are expected to slash growth and inflation projections as the euro zone suffers its biggest slowdown in half a decade.

Euro zone bond yields, notably those of German bunds, have declined amid the cloudy European economic outlook and weighed on the common currency.

The Federal Reserve's recent shift to a dovish tilt was expected to affect ECB monetary policy.

"If the Fed were to lower interest rates, it would be natural to assume that the ECB would follow suit. The German 10-year yield will likely fall into the negative if expectations for a rate cut by the ECB increases," said Makoto Noji, chief currency and foreign bond strategist at SMBC Nikko Securities.

The 10-year German bund yield yielded 0.110 percent on Monday after brushing 0.077 percent on Feb. 8, its lowest since October 2016, following sharp cuts to the European Commission's euro area economic growth forecasts.

The dollar was a shade lower at 110.52 yen after gaining a modest 0.15 percent overnight.

The Australian dollar was down 0.2 percent at $0.7116 following the release of the Reserve Bank of Australia's (RBA) policy meeting minutes on Tuesday.

The minutes of RBA's first policy meeting of the year in February showed that the central bank saw "significant uncertainties" on the economy as the once high-flying property market nosedives, a major reason rate cuts might be back on the table.

RBA Governor Philip Governor Lowe on Feb. 6 had opened the door to a possible rate cut by acknowledging growing economic risks, in a remarkable shift from its long-standing tightening bias that sent the Aussie tumbling.

(Editing by Kim Coghill)

By Shinichi Saoshiro

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