Euro set for biggest monthly drop since mid-2019 on economy fears

By Saikat Chatterjee

LONDON (Reuters) - The euro languished below $1.18 on Monday as the prospect of tougher coronavirus curbs in France and Germany weighed on the short-term outlook for the European economy.

The common currency is headed for its biggest monthly drop since mid-2019 as Europe's faltering vaccination programme runs into a wave of new infections even as positioning data showed investors remain heavily long euros. and

The euro was down 0.1% in early London trading at $1.1774, not far above last week's four-and-a-half-month trough of $1.1762. On a monthly basis, it is down 2.3%, its biggest fall since July 2019.

Compounding the single's currency woes has been the widening interest rate differentials between German and U.S. yields with the spread between 10-year debt widening to 200 bps from 150 bps at the start of the year, boosting the greenback.

"Much focus will remain on the virus situation in Europe and whether lockdowns can slow rising case numbers and also whether the slow pace of vaccinations can finally reach exit speed," ING economists said in a daily note.

The dollar held firm broadly against its rivals as a slight risk-off sentiment rippled through global markets with U.S. stock futures in negative territory in quiet quarter-end rebalancing flows.

Against a basket of its rivals, the dollar steadied at 92.810, just below a November 2020 high of 92.92 hit last week.

Weekly positioning data showed the broad trend of growing dollar bullishness remained firmly in play with hedge funds cutting their overall short dollar bets to their lowest levels since June 2020 while ramping up their bearish bets on the yen.

Virus-driven caution also helped the dollar higher against the Australian dollar, New Zealand dollar and sterling and it rose against oil-liked currencies as the re-floating of the ship blocking the Suez Canal pushed crude prices down by about 1.5%.

The Aussie was last down 0.3% at $0.7621 on Monday and the New Zealand dollar had dropped 0.3% to $0.6978, while sterling GBP= slipped 0.2% to $1.3767.

"The U.S. is also being helped on its own by some pretty good economic data, fantastic rollouts of vaccines, good pace of vaccination and (positive) stock markets," said Westpac currency analyst Imre Speizer.

 

(Reporting by Saikat Chatterjee; Additional reporting by Tom Westbrook in SINGAPORE; Editing by Nick Macfie)