Euro sinks against dollar as US assets look more attractive

Bank notes of the Chinese yuan, Japanese yen and the U.S. dollar.
Zhang Peng | LightRocket via Getty Images

The euro dropped to more than two-year lows against the dollar on Thursday as concerns about a sharp rise in the number of new cases in the coronavirus outbreak in China led investors to seek out U.S. assets.

The United States is better placed to weather the economic impact of the virus than the eurozone. The coronavirus death toll in China's Hubei province increased by a record 242 on Thursday to 1,310, with a sharp rise in confirmed cases after the adoption of new methodology for diagnosis, health officials said.

"Europe, and Germany in particular, have very strong trade linkages to Asian markets, and specifically with China," said Mazen Issa, senior FX strategist at TD Securities in New York. "Coming into the year, expectations were for a moderate growth rebound. While it did seem reasonable at the time, the disruptions are going to delay that narrative."

The euro dropped as low as $1.0835, the lowest since May 2017. It breached technical support at the October low of $1.0877 on Wednesday. That leaves the currency vulnerable to further losses, analysts said. The single currency also fell against the safe haven Swiss franc to 1.0610 francs, its lowest level since August 2015. The Japanese yen gained against the dollar to 109.78 yen.

The greenback has benefited against the euro from a popular carry trade, where investors borrow in low-yielding currencies such as the euro and invest in dollars or other higher-yielding currencies.

Expectations that central banks will hold rates low, and may provide more accommodation if the coronavirus harms the global economy, is supporting risk appetite and may reduce the likelihood of a sharp selloff in stocks. "The perspective is that rates will remain low, and that is cushioning some of the downside on the equity side," Issa said. Stocks overcame earlier weakness to hit record highs on Thursday.

They have set a record closing high every day this week. U.S. data on Thursday showed that U.S. underlying consumer prices picked up in January as households paid more for rents and clothing, supporting the Federal Reserve's contention that inflation would gradually rise toward its 2% target.