Euro climbs back above $1.08, volatility spikes

• The euro has fallen 3.6pc to the dollar this year, as Europe's economic data has deteriorated while that of the United States has mostly improved.
• The euro was 0.13pc higher at $1.0805. One-month euro-dollar implied volatility rose to its highest in six weeks.
• The yield curve between U.S. three-month bills and 10-year notes inverted overnight, a bearish economic signal.

LONDON: The euro rose on Wednesday as improving risk sentiment in global markets paused the dollar's rally, providing relief to the single currency, which had earlier fallen to three-year lows after a survey showed weakening confidence in Germany.

The euro has fallen 3.6pc to the dollar this year, as Europe's economic data has deteriorated while that of the United States has mostly improved.

On Tuesday, Germany's ZEW research institute said in its monthly survey that investors' mood had deteriorated far more than expected in February, on worries coronavirus would curtail world trade.

"I've been talking for some time about the risk of a further downturn in euro/dollar from a fundamental point of view, based largely on the widening difference in expected growth between the two regions," said Marshall Gittler, head of investment research at BDSwiss.

"There's also a technical argument to be made for a lower euro: the single currency is approaching a major long-term support level."

By 0844 GMT, the euro was 0.13pc higher at $1.0805. One-month euro-dollar implied volatility rose to its highest in six weeks.

But amid signs that the coronavirus outbreak is starting to slow, global markets turned around on Wednesday. Riskier assets -- stocks, oil and copper -- were all up.

China posted the lowest daily increase in new infections since Jan. 29, considered an indication containment efforts were working.

A Bloomberg report, citing sources, that China is considering cash injections or mergers to bail out airlines hit by the virus also supported risk appetite.

The safe-haven Japanese yen, which tends to benefit from uncertainty, eased against the dollar to hit its lowest level in nearly a month. It last traded 0.2pc lower at 110.08 per dollar.

The dollar index, which measures the U.S. currency against a basket of its peers, was 0.04pc lower at 99.404.

The yield curve between U.S. three-month bills and 10-year notes inverted overnight, a bearish economic signal.

Investors are looking to the minutes from the Federal Reserve's January meeting, due at 1900 GMT, for insight into the Fed's thinking about virus risks.

The Australian dollar gained 0.15pc to $0.6697, benefiting from the risk-on mood in markets. New Zealand's dollar also gained 0.2pc.

The antipodean currencies, heavily exposed to China, have lost more than 4.5pc against the dollar this year.

Norway's krone, sensitive to global growth via oil exports, has shed 6pc, and it slumped to an 18-year low overnight.

That pushed the yen to the weaker side of 110-per-dollar and gave a little boost to Asia's export currencies.

China's yuan, however, touched a two-week low after the central bank fixed a softer-than-expected trading band, and as investors expected further monetary easing.

"It's a tug of war between wait-and-worry and being relieved that the infection rate is slowing down," said Bank of Singapore currency strategist Moh Siong Sim.

"The specific moves this morning are related to more policy help from China ... there's some relief that more help is on the way and that is restoring some positivity to the market."

The new coronavirus has caused 2,004 deaths in China and infected more than 74,000 people.

European purchasing managers index numbers and part-month Korean export figures, both due on Friday, are also going to be closely watched for signs of economic impact.

The pound was flat to the dollar at $1.2993, before UK inflation data due at 0930 GMT.

The British currency gained on Tuesday after UK finance minister Rishi Sunak announced the budget would be presented on March 11 as planned.