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Euro fell sharply Friday while dollar continued gaining

The euro tumbled down on Friday to almost 16-month lows. In western Europe, Austria became the first to reimpose a full lockdown. Germany also did not rule out doing the same. The common currency has traded in the red all week. Growing expectations about interest rates tightening faster elsewhere, particularly in the United States, pressured the currency.

On the other hand, the dollar remained on track for a fourth consecutive week of gains against major currencies, capitalizing on the euro’s struggles.

On Friday, European Central Bank President Christine Lagarde reiterated her cautious position, announcing that the ECB is not planning to tighten policy in the near future as it could undermine recovery.

The covid cases are rising in the eurozone. Germany’s health minister warned that lockdown restrictions could return there. Austria issued that it would require all its citizens to be coronavirus vaccinated by February.

Stephane Ekolo, the global equity strategist at brokerage Tradition, noted that if the whole of Europe had to go under lockdown once more, they would need to rethink their growth scenarios depending on how long that would last.

The euro plummeted down more than 1% this week, dropping by two-thirds of a percent on the day. The currency also fell below $1.13 at one point, trading close to a low of $1.12630 reached on Wednesday. Furthermore, the euro weakened across the board. It tumbled down by more than six-year lows against the Swiss franc, last exchanging hands lower by 0.5%. The British Pound shaved off some of its recent gains, dropping by 0.5% at around $1.34330.

 

How did the U.S. dollar fare?

The dollar index is currently on course for almost a 1% weekly gain against a basket of six major currencies. The greenback climbed up by 0.4% on the day at 95.958. It traded close to the 16-month high of 96.266 reached on Wednesday.

Investors expect the dollar to strengthen further into next year. Earlier this week, U.S. retail sales came stronger-than-expected after last week’s inflation surprise. Analysts at UBS noted that a combination of the Federal Reserve’s tapering and slowing global growth should support the U.S. dollar in 2022.

In Asia, the Japanese yen soared after the announcement of Austria’s lockdown. Investors sought safe-haven currencies. The yen traded higher by 0.3% against the greenback at 113.93 yen at last. The currency had declined slightly earlier after Japan’s government unveiled a fresh 55.7 trillion-yen ($490 billion) stimulus package.

 

What about the Turkish Lira?

A recent rebound in Turkey’s lira proved short-lived on Friday. The currency is on course for its worst week since March. At the same time, Poland’s zloty plunged to its lowest level in more than a decade. While the greenback surged over the euro’s weakness, MSCI’s index of emerging market currencies dropped to two-week lows.

Russia’s rouble also reversed session gains, trading near two-month lows. Declining oil prices furthered the crude exporter’s losses, pushing the rouble lower. The South African rand fell by 0.6%, as well.

On Friday, the broader EM index remained on course to end the week lower by about 0.4% after a battering few days marked by a strong USD.

After climbing up to 1.7% earlier in the session, the Turkish lira dropped back beyond 11 to the greenback, extending losses to a ninth consecutive session. The currency is set to lose almost 13% over the period.

On Thursday, the lira collapsed to a record low of 11.3 to the dollar. It shaved off 6% after the central bank ignored soaring inflation and cut the key interest rate by 100 basis points to 15%. It also signaled another cut next month.

However, analysts say that the impact of Turkey’s currency crisis will be limited in the broad FX markets. Shilan Shah, the senior economist at Capital Economics, noted that EM currencies don’t look like they are in need of a significant adjustment. Moreover, foreign investors have already pared back their exposure to Turkey after years of crises and erratic policymaking.

Meanwhile, JPMorgan turned underweight on currencies in the Middle East, emerging Europe, and Africa over the prospect of higher core bond yields in developed markets and increased inflation.  

Hungary’s forint declined by 0.8% to stop a four-session gaining streak. Furthermore, Poland’s zloty tumbled down by 0.1%, losing for the seventh in eight sessions. A migrant crisis at Poland’s border with Belarus has sparked broader geopolitical tensions and pressured the zloty.

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