Euro rebound may be short lived
The euro was trading 0.3 per cent higher at US128.14¢. The single currency was also helped by a better than expected report on German retail sales in February, which gained 0.4 per cent from January, according to the federal statistics office Destatis.
The Australian dollar was marginally lower at US104.14¢.
The yen remained firm after the new Bank of Japan chief, who has argued for a weaker currency, called Japan's massive debt "abnormal" and warned that Tokyo must avoid a plunge in confidence among bondholders. The yen ended flat against the euro, at 120.64, while the US dollar slipped to 94.12 yen from 94.42.
The euro's rebound against the greenback was limited as analysts warned the Cyprus crisis was not over and Italian politicians failed to produce a governing coalition amid more strains on the economy.
"The euro pared the sharp decline from earlier this week as capital controls in Cyprus helped the periphery country to avert a bank run," said David Song of DailyFX.
"But the weakening outlook for the region may continue to drag on the exchange rate as European policymakers maintain a reactionary approach in addressing the risks surrounding the region."
Analysts at Nomura said they still foresee a gradual weakening of the euro. "Beyond Cyprus, the medium-term picture for the euro remains negative," they said in a note.
"The divergence between key macroeconomic and financial market trends in the eurozone and the US will likely be an increasing important driver of the euro."
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The euro bounced back after Cyprus reopened its banks following a two-week closure. The return of relative calm — with depositor losses and capital controls failing to spark wider panic — plus a better-than-expected German retail sales report for February helped lift the single currency.
Analysts suggest the rebound may be limited: they warn the Cyprus crisis hasn’t fully passed and political uncertainty in Italy continues to strain the region. Nomura said the medium-term outlook for the euro remains negative and expects gradual weakening, so investors should be cautious about assuming the rise will persist.
Capital controls in Cyprus helped avert a bank run, which pared some of the euro’s earlier sharp decline, according to David Song of DailyFX. However, analysts still see risks that could keep pressure on the exchange rate until broader regional issues are resolved.
The article reported the euro trading about 0.3% higher at US128.14¢, the Australian dollar marginally lower at US104.14¢, and the yen flat against the euro at 120.64. It also noted the US dollar slipped to 94.12 yen from 94.42.
A better-than-expected report from Germany’s federal statistics office, Destatis, showed retail sales rose 0.4% in February from January. That stronger-than-expected data supported the euro’s short-term rebound against the dollar.
Nomura analysts said they still foresee a gradual weakening of the euro, calling the medium-term picture for the currency negative. They highlighted that the growing divergence between macroeconomic and market trends in the eurozone versus the US is likely to be an increasingly important driver of the euro.
The new Bank of Japan chief described Japan’s massive debt as “abnormal” and warned against a plunge in confidence among bondholders; he has also argued for a weaker currency. Despite that, the yen remained relatively firm in trading and ended flat against the euro.
Investors should monitor developments in Cyprus and Italy, central bank commentary (including the Bank of Japan), and economic indicators like German retail sales. These political and macro trends — and the divergence between eurozone and US conditions highlighted by analysts — are likely to influence exchange rates going forward.
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