Rush into safe haven assets pushes euro to highest since late 2021

Zawya

2 days ago

The euro hit its highest level in almost four years against the U.S. dollar as investors rushed into safe-haven assets on Thursday while remaining cautious about the impact of the U.S.-China trade deal.
Geopolitical risks were in focus after President Donald Trump said some U.S. personnel were being moved out of the Middle East because "it could be a dangerous place", adding that Washington would not allow Iran to develop a nuclear weapon.
A cocktail of rising Middle East tensions and concern over the fragility of the trade truce between the U.S. and China drew investors into safe-haven assets.
Analysts noted that the dollar serves as a key barometer of trade talks sentiment, while geopolitical instability prompted investors to buy safe-haven Swiss francs and yen.
The franc rose 1.01% to 0.8123 versus the greenback , its highest level since April 22, and the yen climbed 0.70% to 143.40.
The euro reached its highest since late 2021 at $1.1610 and was last up 0.99% at $1.1600.
Some analysts argued that the euro has also drawn support from a hawkish European Central Bank, which hinted at a pause in its year-long easing cycle after inflation finally returned to its 2% target.
However, ECB policymaker Isabel Schnabel said on Thursday the strong euro exchange rate is driven by a positive confidence shock in Europe - investors being drawn to the euro as a safe haven - and not by interest rate differentials.
TRADE DEAL DEADLINE
On the trade front, Trump said he would be willing to extend a July 8 deadline for completing trade talks with countries. But he added that the U.S. would send out letters in coming weeks specifying the terms for trade deals to dozens of other countries, which they could then embrace or reject.
Investors argued that such a move keeps the risk of a July 9 jump in U.S. import tariffs on the table, which is regarded as negative for the dollar. The greenback and U.S. Treasuries dropped sharply after Trump announced a blitz of reciprocal tariffs - which he dubbed "Liberation Day" - in early April.
"By year-end, we do not expect the effective average tariff rate to be much different from its current value," said Inga Fechner, senior economist for global trade at ING, indicating duties at 10-15% for the euro area, 50% for China and 10-15% for the rest of the world.
Against a basket of currencies, the dollar fell 0.74% at 97.84. It hit 97.786, its lowest since March 2022.
U.S. Treasury yields dropped on Wednesday as the closely watched "core" consumer price index eased some pressure on the Federal Reserve to maintain higher interest rates for longer.
However, analysts remained cautious about the inflation outlook ahead of Thursday's release of the producer price index.
"We suspect the core Personal Consumption Expenditures Price Index (PCE) reading will prove modestly firmer, although the result will also hinge on the inputs from core PPI," said David Doyle, head of economics at Macquarie.
"Despite the subdued figures, through year-end, we expect year-on-year core inflation to remain elevated and potentially (to) rise as price pressures flow from recent tariff implementation."
Markets priced two Fed rate cuts of 25 basis points by year-end, with an 80% chance of the first move in September and 100 bps by September 2026.
The onshore yuan rose 0.1% to 7.1818 per dollar, though gains were capped by the still-fragile truce in the U.S.-China trade war and the uncertainty surrounding the next moves of the two countries.
Barclays sees plenty of headwinds over the medium term that could push the currency back onto a depreciation path, even if it might gain a little further from below 7.20.
(Reporting by Stefano Rebaudo; editing by Jacqueline Wong, Toby Chopra and Mark Heinrich)