The euro lost ground against the US dollar and held even against the yen on Friday as investors curbed their recent enthusiasm for the single currency ahead of upcoming events that could test their appetite for risk. As trading volumes dried up heading into the weekend, the euro came off a six-week high against the yen reached earlier on Friday. The greenback ended the week at a five week high against the Japanese currency.
---- Yen dented by better risk appetite, higher Treasury yields
The upturn for the euro had been fuelled by Thursday's comments from German Chancellor Angela Merkel who appeared to back European Central Bank President Mario Draghi's vow to do all that is necessary to defend euro. Her comments increased expectations the ECB would buy Spanish and Italian bonds next month to lower the two countries' borrowing costs.
"Yesterday we saw a lot of short-covering and now people are taking profits ahead of next week, which should bring a lot of headline risk," said Mary Nicola, foreign exchange strategist at BNP Paribas in New York. "Having said that, trade flow is low, so it is pretty hard to tell a story about today's market move," she said. Next week, euro area "flash" purchasing managers' indexes and minutes from the last meeting of the Federal Open Market Committee, the Fed's policy making arm, will emerge.
The euro last traded at 98.01 yen, up 0.01 percent, after hitting a global session high of 98.40, its highest since early July. Against the dollar the euro was down 0.26 percent at $1.2322. The dollar, meanwhile, rose to a five-week high against the yen, with gains accelerating after a survey showed US consumer sentiment improved in early August to its highest in three months.
For most currencies, the threat of substantial event risk begins August 31, when Federal Reserve Chairman Ben Bernanke gives a speech in Jackson Hole, Wyoming, according to Camilla Sutton, chief currency strategist at Scotia Capital in Toronto. While US data has improved, the factors that influence future growth are widely negative, she said. "Accordingly, we continue to believe that the Fed will still look toward further policy easing," she said. "Next week's FOMC minutes might provide some early clues."
A Reuters poll on Thursday showed economists expect the ECB to begin buying bonds of Italy and Spain in September, and to cut its main refinancing rate to a record low of 0.5 percent. Surprisingly strong US retail sales figures earlier this week and other better data since have tempered expectations the Fed will launch another round of bond-buying, or quantitative easing, as early as September. US Treasury yields have risen as a result.
The strong relationship between the performance of the dollar against the yen and yield spreads between US and Japanese government bonds could cause the dollar to add to its gains if US yields rise further. The dollar hit a global session high of 79.57 yen, its strongest since mid-July. It last traded at 79.55, up 0.29 percent on the day, according to Reuters data.
"Perhaps the most important development this week has been the rise in the 10-year US Treasury yield from 1.63 percent to 1.85 percent," said Michael Woolfolk, an FX strategist with BNY Mellon in New York. "This, along with the buoyancy in global equity markets suggest that a short squeeze in risky assets may be in the works going into US Labour Day as bets on a "prefect storm" this summer have yet to materialise," he added.
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