FOREX-Euro rises, risky currencies recover as traders stop cashing profits

Investors had earlier decided to unwind their positions after a rapid build-up of bets on risk assets that had taken off on hopes of further reopening of economies. But hopes of a post-COVID global recovery, the easing of U.S.-China trade tensions and the prospect of capped long-term yields in the United States weighed on the U.S. dollar, pushing it lower against most major currencies except the Japanese yen.

The euro edged up against the U.S. dollar on Friday, not far from the three-month high it rose to earlier in the week, as traders paused from cashing in latest profits, reversing the sell-off seen in the Asian trading session.

In Asian hours, the Australian dollar and other risk-sensitive currencies gave up ground, before recovering and trading higher against the safe-haven greenback when Europeans woke up, following a rise in European stocks. Investors had earlier decided to unwind their positions after a rapid build-up of bets on risk assets that had taken off on hopes of the further reopening of economies.

But hopes of a post-COVID global recovery, the easing of U.S.-China trade tensions, and the prospect of capped long-term yields in the United States weighed on the U.S. dollar, pushing it lower against most major currencies except the Japanese yen. "There was a risk premium embedded into it, but now these things are being priced out," said Vasileios Gkionakis, global head of FX strategy at Lombard Odier.

"There's definitely going to be bumps in the road, but I think things are improving so there's an incentive for the market to price out that risk premium for the dollar and therefore the dollar has softened close to fair value levels." The euro rose 0.3% to $1.1332, staying close to $1.1422, the three-month high it reached on Wednesday.

The dollar went up only against the Japanese yen, trading lasts up 0.5% to 107.39. The Aussie dollar rose 0.7% to 0.6901 versus its U.S. counterpart, after falling to a 10-day low of 0.6799 in the Asian session. Against the Japanese yen, it rose from 1.3% to 73.98.

The Nordic currencies also rose, as did the oil-sensitive Canadian dollar, which was last up 0.6% at 1.3552. The Norwegian crown was one of the biggest movers, rising by 1.1% to 9.53 against the U.S. currency, having fallen earlier during the Asian trading session to an 11-day low. Investors grew more concerned that swings like that could become more persistent in the coming months, pushing the cost of options in euro/dollar higher.

Euro one-month implied volatility gauges embedded in options contracts rose to 8.62%, their highest level since April 6. The cost for three-month and six-month options contracts also rose to their highest level since April 23 and April 27 respectively, Vasileios said that the reason behind the rise in volatility was the fact that the euro has been overbought and market participants wanted to hedge.

On top of that, there are a number of key events in the next few days, including discussions on the European Union recovery fund, Brexit negotiations as well as Bank of England and Swedish National Bank meetings, in addition to Federal Reserve Chair Jerome Powell's semi-annual testimony to the Senate banking committee. Elsewhere, the British pound remained unfazed by the fact that Britain's economy shrank by a record of 20.4% in April from March as the country spent the month in a tight coronavirus lockdown, official data showed on Friday.

Investors saw the number as what is likely to be the bottom of the crash before a long and slow recovery. Sterling was last up 0.2% at $$1.2632 and flat versus the euro at 89.66 pence.

"As long as governments around the globe continue to ease their lockdown measures, and as long as economic data continues to point that the deep economic wounds due to the coronavirus are behind us, we would treat the retreat as a corrective phase of the broader recovery," said Charalambos Pissouros, senior market analyst at JFD Group. "We still see decent chances for equities and other risk-linked assets to rebound again, and for safe havens to come under renewed selling interest," said Pissouros.