Euro adds to robust gains in March

The euro came close to its highest level against the dollar in almost four months on Wednesday, as investors waited nervously ahead of Donald Trump’s first key legislative test over the repeal of Obamacare.

This week the euro has gained 0.8 per cent against the US currency, taking its rise this month to 2.6 per cent and leaving it worth $1.0825 late on Wednesday.

Euro strength is, in part, down to investors’ uncertainty about when the US president’s administration will be able to steer tax reform and fiscal stimulus through a Congress debating Mr Trump’s plan to replace the healthcare scheme introduced by his predecessor, Barack Obama.

The Trump trade, which propelled the dollar higher, was built on expectations that a Republican-controlled congress would provide a safe passage for the president’s pro-business reforms. But there were growing doubts about his ability to win a House vote on Thursday to repeal Obamacare.

Also climbing against the dollar is the yen, which at one point on Wednesday was 0.9 per cent higher at a four-month high, taking its gains for the year to 5 per cent. The index that measures the dollar against its peers retreated to 99.56, adding up to a decline for March of almost 2 per cent.

Weakness in the dollar is just one factor buoying the euro. Also adding to appetite for the single currency is investors’ increasing attention on the prospect of the European Central Bank pulling away from monetary easing.

The euro is “the currency investors love to hate”, said Axel Merk, president of San Francisco-based Merk Investments. However, it has been finding support because investors increasingly believed that the lows in rates had been reached.

“The dollar started to surge at the first talk of tapering, even as the first actual rate hike was far, far off. Similarly, the euro may well start appreciating well before rates will actually go up again in the eurozone,” said Mr Merk.

Also offering support to the euro are opinion polls in France suggesting far-right presidential candidate Marine Le Pen is unlikely to win the keys to the Elysée Palace.

Dutch lender Rabobank has been forecasting the euro to rise to $1.10 by the end of the year, on the basis of disappointment in the Trump reflationary plans and euro short-covering after the French election.

“We would argue that concerns about political risk in Europe are not weighing as heavily on the single currency as at the end of last year,” said Rabobank strategist Jane Foley.

But if European political risk from France is waning for some investors, it may yet resurface in Italy. Steve Barrow, G10 strategist at Standard Bank, warned that Italian elections in early 2018 could cast doubt on Italy’s participation in the eurozone.

“It means that if the euro jumps on the French election result in May, it could come down to earth with quite a bump as the next Italian election approaches,” said Mr Barrow.

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For now, though, many analysts believe reasons to buy the euro are plentiful. It is also getting a boost because of its role as a funding currency. Retreats in risk appetite, as seen in the sharp sell-off in US stocks on Tuesday, force those who borrowed in euros to fund purchases of higher-yielding assets to scale back those bets and buy back the euro, said Mr Merk.

On the dollar side, Mr Merk added, the dollar was also being hurt by the Federal Reserve’s unwillingness to take an aggressive line on rates policy and the Trump administration’s tilt towards protectionism.

“Our take is: if you introduce barriers to trade, we believe currencies of countries with current account deficits tend to suffer,” said Mr Merk. “The greenback qualifies, and the recent decline coincides with more protectionist talk coming from the Trump administration.”

Positioning data from Deutsche Bank for the week to Tuesday showed aggressive selling in the dollar, while the euro was the most heavily bought of the main currencies.