FOREX-Euro inches higher, eyes on Iraq, Russia

Fri Aug 8, 2014 1:33pm BST

* Move towards safe havens squeezes out euro bears

* Approval of U.S. air strikes dominates market mood

* Concern over Russian sanctions impact on European growth

* Dollar hits 2-week low versus safe haven yen (Updates with early European trade, changes dateline from previous TOKYO)

By Patrick Graham

LONDON, Aug 8 (Reuters) - The euro gained back some ground against the dollar and sterling on Friday, while investors sought the traditional safety of the yen and Swiss franc after U.S. President Barack Obama approved air strikes in Iraq.

Obama said in an address that he authorised targeted strikes to protect the besieged Yazidi minority and U.S. personnel in Iraq, after the Iraqi government requested help.

The benchmark U.S. Treasury yield fell to a 14-month low as bond prices rose after the air strike news, helping to weaken the dollar almost half a percent against the yen. The franc gained a quarter of a percent.

The euro was respectively 0.3 and 0.2 percent higher against sterling and the U.S. currency. Several traders said that looked largely the result of a brief squeeze on bets taken against the single currency which might clear the way for more losses next week.

"There could be a little bit of profit-taking in this move on the euro," said Ian Stannard, head of European FX strategy at Morgan Stanley in London.

"I think the euro will come under more pressure next week. There was a lot of emphasis from the European Central Bank yesterday on the geopolitical risks to growth and if we see sanctions begin to take an effect, that will leave the euro exposed."

Currency markets in general have been resistant to alarms over Ukraine, Gaza or Iraq, but there is growing concern that a mix of growth-sapping sanctions and potentially higher oil prices could derail the global economy.

A Russian ban on Western food imports is expected to weigh chiefly on European growth and the euro.

That has begun to overshadow the past month's big play - a push by the dollar to 11-month highs that has supported speculation the U.S. currency was finally on track for a longer-term rally.

The euro blipped briefly back above $1.34 before consolidating to trade 0.1 percent higher on the day at $1.3394. It is still down six full cents from a peak in early May.

"Geopolitics is muscling out the Fed as the primary market focus," analysts from Citigroup said in a morning note, referring to the discussion of U.S. growth and Federal Reserve monetary policy which has dominated markets this year.

"In the case of euro/dollar we are dealing with a positioning squeeze more than anything else. We saw waves of profit taking in long dollar positions against the yen and franc. Now it's the euro's turn, it seems, with investors closing short positions."

The yen gained as much as 0.4 percent on the day in early European trade, before easing back to around 101.92, up 0.1 percent on the day.

"Broadly speaking dollar/yen is still in a range centred around 102. But it failed to establish a foothold above 103 last week after the weaker-than-expected U.S. non-farm payrolls," said Masafumi Yamamoto, market strategist at Praevidentia Strategy in Tokyo.

"With the economic impact of the Ukrainian conflict now drawing more attention and Treasury yields declining, downward bias for the dollar is building," he said. (Additional reporting by Shinichi Saoshiro; Editing by Toby Chopra/Ruth Pitchford)

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