Interest rate differentials weigh down the euro

The euro slumped for a fifth straight session against the US dollar on Friday to a 3-1/2 week low as falling European interest rates drove investors into greenbacks and the yen. The euro traded around $1.06005, off 0.54 percent on the EBS trading platform. It had slumped to $1.05670, its weakest level since March 17. For the week the euro lost 3.38 percent, its worst week against the greenback since September 2011.
"You can look at euro/yen, clearly breaking lower. The big picture globally is negative yields in the euro zone and long yields trading at incredibly low yields, substantially lower than Japanese yields," said Jens Nordvig, global head of currency strategy at Nomura in New York.
"That is triggering this persistent (fixed-income) asset allocation shift out of euro zone," he said.
At its low, the euro was off 1.28 percent to 127.22 yen, its weakest point in four weeks before recouping ground to trade at 127.43 yen, down 0.86 percent. For the week the euro fell 2.35 percent against the yen.
Nordvig notes how euro zone yields have flipped versus those of Japan. Whereas a year ago German 30-year yields were 75 basis points above equivalent Japanese yields, now they are exactly the opposite.
European Central Bank measures to loosen monetary policy via a program of bond buying contrasts against the US Federal Reserve's trajectory for tightening policy after ending its own massive stimulus plan which is credited with helping boost economic growth
One spot of weakness for the dollar, marring its general push higher, is against the yen. It lost 0.33 percent to 120.18 yen.
Sterling hit a near five-year low of $1.4585 before easing back to $1.4637, still off 0.51 percent on the day and 1.89 percent for the week.
Markets are focused on Britain's May 7 elections which are set to generate a potentially destabilising period of negotiations to form a government.
The cost of hedging against volatile moves in the pound around the vote has risen steadily since the start of the year and finally begun to show up in spot rates of sterling as well.
"A $1.40 level for sterling/dollar is certainly not out of reach if the election aftermath turns ugly," said Standard Bank currency strategist Steve Barrow in London.