Euro undermined by force of rate differentials

Stoyan Nenov | Reuters

The euro slumped for a fifth straight session against the U.S. dollar on Friday to a 3-1/2 week low as falling European interest rates drove investors into greenbacks and the yen.

"You can look at euro/yen, clearly breaking lower. The big picture globally is negative yields in the euro zone and long yields trading at incredibly low yields, substantially lower than Japanese yields," said Jens Nordvig, global head of currency strategy at Nomura in New York.

"That is triggering this persistent (fixed income) asset allocation shift out of euro zone," he said.

European Central Bank measures to loosen monetary policy via a program of bond buying contrasts against the U.S. Federal Reserve's trajectory for tightening policy after ending its own massive stimulus plan which is credited with helping boost economic growth.

Australian dollar

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Against the yen, the euro fell about 1 percent to 127.40.

Nordvig notes how euro zone yields have flipped versus those of Japan. Whereas a year ago German 30-year yields were 75 basis points above equivalent Japanese yields, now they are exactly the opposite.

One spot of weakness for the dollar, marring its general push higher is against the yen. It fell 0.33 percent to 120.175 yen.

The euro traded around $1.060, off 0.60 percent. It had slumped to $1.05670, its weakest level since March 17. The euro is on track for its worst week against the greenback since September 2011.

Sterling hit a five-year low of $1.4585 before easing back to $1.4642, still off 0.5 percent on the day.

Sterling is on track for a dismal week against the U.S. dollar. Markets are focused on Britain's May 7 elections which are set to generate a potentially destabilizing period of negotiations to form a government.

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The cost of hedging against volatile moves in the pound around the vote has risen steadily since the start of the year and finally begun to show up in spot rates of sterling as well.

"A $1.40 level for sterling/dollar is certainly not out of reach if the election aftermath turns ugly," said Standard Bank currency strategist Steve Barrow in London.