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Euro Nears Two-Year High as Investors Bet on Europe's Covid-19 Progress

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07/28/2020 | 06:46am EDT

By Caitlin Ostroff

The euro traded near a two-year high against the dollar on signs that Europe has largely slowed down coronavirus infections and taken steps toward bolstering its weakest economies.

The currency used by the 19 eurozone nations ticked down 0.3% Tuesday to about $1.1722 a euro, remaining near a level last seen in September 2018. That leaves the euro's rally so far in July at 4.3%, on course for its best monthly performance in four years.

The euro's advance in part reflects concerns about the U.S.'s uneven progress in halting fresh infections and the implications for economic recovery, which have weighed on the dollar this month. Europe looks good in comparison: Social-distancing measures, wearing face masks and washing hands helped limit the spread of coronavirus in much of the region as lockdown measures were lifted.

"We had the notion before the virus that the eurozone was a big drag to the global economy," said Francesco Pesole, a foreign-exchange strategist at ING Bank. "After these coronavirus lockdowns have eased, markets have started to change their mind."

In contrast to the euro's rally, the dollar has weakened sharply. The ICE U.S. Dollar Index, which measures the greenback against a basket of other currencies, shed 3.6% this month to fall to its lowest level since September 2018.

Speculative traders have piled into more upside bets on the euro than any other G-10 currency since the European Union hashed out an agreement on the terms for a EUR750 billion ($881 billion) recovery fund earlier this month. Under that deal, the 27 member nations will jointly raise hundreds of billions of euros through the sale of common bonds for the first time, and disburse grants and loans to the hardest-hit countries in the region.

The deal is "an important political signal about the commitment of European officials to the European project," said Zach Pandl, co-head of global foreign exchange, interest rates and emerging markets strategy research at Goldman Sachs Group.

Earlier this month, Mr. Pandl revised a 12-month forecast for the euro from $1.17 to $1.25.

"Europe is likely to have faster economic growth than the U.S. over the next few years, reflecting primarily better virus control," he said.

However, the optimism surrounding Europe's ability to engineer a relatively speedy economic recovery may be overblown, investors said.

The negotiations for the recovery fund were prolonged by disagreements over what would be spent and how much could be handed out in grants to the weakest economies. The funds also won't be handed out until next year. Any fresh disagreements, hurdles or delays could halt the euro's gains, and even lead to a reversal.

Some European countries including Spain are also seeing a rise in coronavirus infections. A significant portion of the region's business activity remains anemic even after restrictions were eased, especially in the travel and tourism sector, and the eurozone's economy is expected to shrink by as much as 9% this year.

Some analysts see bets on the euro advancing as simply bets that the dollar will weaken against other currencies, rather than a sign of confidence in the region's prospects. After the Federal Reserve slashed interest rates to near zero this year, the interest-rate difference between the dollar and other currencies narrowed, making it less attractive. This has drawn traders to other currencies.

"It seems to me the market might be pricing in a too negative scenario for the U.S., and a too positive scenario for Europe," said Athanasios Vamvakidis, head of foreign-exchange strategy at Bank of America Global Research.

Despite the dollar weakening, it continues to be viewed as a haven asset, analysts said. This could drive some investors to the greenback, and out of the euro, if risk appetite dims.

Write to Caitlin Ostroff at caitlin.ostroff@wsj.com


Stocks mentioned in the article
ChangeLast1st jan.
BANK OF AMERICA CORPORATION 0.95% 26.6121 Delayed Quote.-25.18%
EURO / US DOLLAR (EUR/USD) 0.19% 1.18373 Delayed Quote.5.19%
ING GROEP N.V. -0.13% 6.943 Delayed Quote.-34.96%
THE GOLDMAN SACHS GROUP, INC. 0.28% 209.0699 Delayed Quote.-7.74%
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