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Euro weakens, sold in favor of higher-yielding currencies

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The euro hovered near a four-month low versus the dollar and a 1-1/2 year trough against sterling on Wednesday, with the single currency under pressure due to a widening yield gap between euro zone bonds and their major peers.

A rise in U.S. yields on speculation that the U.S. Federal Reserve could raise interest rates sooner than previously expected has supported the dollar and put pressure on the euro this week.

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The single currency has also been pegged back by the European Central Bank cutting interest rates last week, including imposing a negative rate on excess cash deposited with it, and other measures to ward off disinflation. That has pushed down euro zone money market rates, eroding the euro's yield allure, and leading some investors to use it as a funding currency - one borrowed cheaply to buy a higher-yielding unit.

Read MoreWhy troubled euro zone bonds are outperforming Treasurys

The euro fell 0.1 percent against the dollar to $1.35, nearing a four-month low set last Thursday soon after the ECB cut interest rates to record lows. It was also down 0.1 percent against the British pound under 81 pence, close to an 18-month low of 80.64 pence struck on Tuesday.

The euro set a near seven-month low against the Australian dollar on Wednesday. It was last down 0.30 percent at A$1.44. Against the New Zealand dollar, the euro last fetched NZ$1.5834, having shed 1.3 percent this week.

The dollar index was steady at 80.82 having gained 0.7 percent so far this month, tracking rising U.S. yields. According to Thomson Reuters data, the yield spread between two-year U.S. Treasuries and two-year German government bonds has risen to more than 37 basis points this week, its highest in seven years.

A strong U.S. jobs report on Friday, and hawkish comments from St. Louis Federal Reserve Bank President James Bullard on Monday have given a lift to U.S. yields this week and helped buoy the greenback against the euro. The euro fell 0.2 percent versus the yen to 138.5 yen , while the dollar was flat at 102.30 yen.

A focal point for the yen is the Bank of Japan's two-day policy meeting on June 12-13. It is likely to keep monetary policy steady at its decision due on Friday and may slightly revise up its assessment on overseas growth.

--By Reuters. For more information on currency prices, please click here.

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