Euro rally continues amid coronavirus crisis

The euro’s powerful run higher continued on Monday with the currency gaining more than 1 per cent against the dollar to mark the sixth consecutive day of appreciation during the worsening coronavirus crisis.

The currency typically falls in times of market stress, but it has broken with its familiar patterns to rally while the virus has spilled beyond China’s borders and raised concerns over global economic growth.

The exchange rate hit $1.1163 against the dollar on the first trading day of March, with a jump of nearly 1.5 per cent at the day’s high. In one week, the euro has climbed more than 3.5 per cent to approach its strongest levels of the year.

The shift validates analysis that has come out in recent months suggesting that, due to its rock-bottom interest rates, the euro is an increasingly popular currency to sell in favour of higher-yielding bets elsewhere — a function usually dominated by the dollar and the yen.

When market conditions sour, and those bets are closed, traders effectively buy back euros and cause the currency to climb. The coronavirus has provided a trigger for those more risk-seeking bets to fold, according to James Malcolm, head of FX strategy at UBS. Up to the beginning of last week, investors had been heavily selling the euro to buy other currencies, Mr Malcom noted, pushing the level of negative bets on the European currency to record levels.

“Our calculations show that there were twice as many negative bets on the euro than at the height of the eurozone crisis,” he said.

Now, investors are in reverse, pushing up the price of the currency in the process. The changing role of the euro has made it more prone to slowly grinding lower in normal times but popping sharply higher when uncertainty rises. George Saravelos, head of currency research at Deutsche Bank, said the euro would shoot to around $1.17 if all the negative bets were closed out.

“A move higher in [the euro] does not require buying of European assets, but merely an unwind of [existing positions],” he said.

Another support for the euro comes from the interest-rate outlook. After the broad sell-off in equity markets over the past week, several key central banks rushed to reassure investors, stirring expectations that interest-rate cuts could be round the corner. Investors are pricing in two rate cuts in the US this year, with analysts noting that the first could come as soon as this month. The European Central Bank, however, has stressed the need for “cool heads”, downplaying the chance of imminent action.

This shift in rate expectations makes the euro more attractive, because the gap in interest rates between the US and the eurozone will probably narrow.

Kit Juckes, a strategist at Société Générale, added that the euro was still significantly undervalued against the dollar, even after the past week’s gains, which is adding to the speed of appreciation.

“It takes much more energy to push a cheap currency down than an expensive one. The image that comes to mind is of the effort required to push a balloon to the bottom of a swimming pool, and what happens when you let it go,” Mr Juckes said.