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Euro makes a biggest monthly fall since 2019

The euro fell below $ 1.18 on Monday as the prospect of tighter coronavirus containment measures in France and Germany weighed on the short-term outlook for the European economy.

The single currency is approaching its biggest monthly fall since mid-2019, as difficulties with the vaccination program in Europe hit a wave of new infections, even as positioning data shows investors remain large long in the euro.

The euro fell 0.1% in early London trading to $ 1.1774, not much above its four and a half month low reached last week at $ 1.1762. On a monthly basis, it was down 2.3%, the biggest drop since July 2019.

The problems with the single currency were exacerbated by widening interest rate differentials between German and US yields, with the 10-year debt spread widening to 200 basis points from 150 basis points at the start of the year, pushing the dollar higher.

“Much attention will continue to be paid to the viral situation in Europe and whether quarantine could slow the rise in infections, and whether the slow pace of vaccinations could finally accelerate,” ING economists note in a daily note.

On the whole, the dollar was stable in relation to its competitors. There is a slight risk appetite in the global markets. Futures on US stocks are in negative territory amid calm rebalancing flows at the end of the quarter.

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

A rise in coronavirus infections and additional isolation measures in the eurozone could prevent a significant gain in the euro against the dollar in the face of any improvement in risk appetite in the near future, Unicredit said.

“While we suspect that much of the positive news for the US dollar has already been absorbed and taken into account by investors, the picture for the single currency remains fragile in the near future,” analysts from Unicredit said.

With the end of the month and first quarter approaching, more options expiring, lower trading activity ahead of Easter break, and a report on the number of US non-farm jobs on Friday, trading is likely to be volatile in the coming days, they said.

Weekly positioning data showed that the overall bullish trend for the dollar remains in place, with hedge funds cutting their overall short dollar rates to their lowest level since June 2020, while increasing their bearish yen rates.

“The US currency is also helped by some pretty good economic data, fantastic vaccine uptake, good vaccination rates and (positive) stock market performance,” said Westpac currency analyst Imre Speiser.

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