Euro underperforms as Paris attacks spur economy worries

The euro was pinned near seven-month troughs against the dollar on Monday, as investors worried about the impact on the euro zone economy of Friday's Paris attacks steered clear of the common currency. Traditional safe-haven the Swiss franc rose 0.4 percent against the euro, while one-month euro/dollar implied volatility, a key gauge of how sharp swings in the currency are likely to be, jumped nearly 5 percent to trade around 12 percent.
Analysts judged the reaction to the worries stemming from the attacks in Paris as rather muted, however, with investors increasingly focused on rising policy divergence between the European Central Bank and the Federal Reserve. Even before the attacks, the euro had lost ground on expectations the ECB will step up monetary easing next month, possibly cutting its deposit rate deeper into negative territory and buying more assets under its quantitative easing programme.
Trends in the money market showed investors are fully pricing in a 10 basis points cut in the deposit rate - from -0.2 percent at present - in December. The euro fell 0.5 percent to $1.0723, not far from last week's 6-1/2-month low of $1.0674, having retreated almost 7 percent from its October 15 peak of $1.1495. It also touched 130.66 yen, its lowest since late April, but last stood at 131.92 yen, down slightly on the day.
"There has been no major upturn in market volatility, but no doubt the attacks in Paris will raise further the uncertainty over the outlook for the euro zone economy," said Derek Halpenny, European head of global markets research at Bank of Tokyo-Mitsubishi. Vitor Constancio, a top ECB policy setter warned on Monday that the attacks could hurt investor confidence. Analysts said the euro's reaction was counter to the behaviour of investors in the summer months, when the single currency was showing apparent qualities of a safe-haven. The euro was a major winner then as investors unwound euro-funded carry trades amid worries about a Chinese-led global slowdown.
Martin Enlund, chief FX strategist at Nordea, said the attacks are likely to raise the risk premium for the euro in the short term, while the longer term a hit to business and consumer sentiment would depend on how sharply risk sentiment sours. The yen gave a muted response to data that showed Japan's GDP slipped more than expected in July-September, the second consecutive quarter of economic contraction.