May 19, 2020 / 3:01 PM / 8 days ago

FOREX-Dollar weak as euro rises on Franco-German proposal for recovery fund

* Dollar softer after successful COVID-19 vaccine trial

* German investor morale improves -ZEW (New throughout, updates prices, market activity, comments to U.S. market open; new byline, changes dateline; previous LONDON)

By Saqib Iqbal Ahmed

NEW YORK, May 19 (Reuters) - The U.S. dollar edged lower against the euro on Tuesday as the common currency added to Monday’s gains following news of a Franco-German proposal for a fund that would offer grants to European Union regions and sectors hit hardest by the coronavirus pandemic.

Encouraging results from the trial of a vaccine for COVID-19 reduced demand for safe havens and the greenback rose to a near one-month high against the Japanese yen..

Germany and France, whose agreements usually pave the way for broader EU deals, proposed that the European Commission borrow 500 billion euros ($550 billion) on behalf of the whole EU. The Commission is expected to outline their proposal before a European summit scheduled for May 27.

The euro was 0.25% higher against the greenback at $1.0942, on pace for a two-day gain of about 1 percent.

“The Franco-German proposal represents a material step forward towards harnessing joint fiscal capacity to provide sustained fiscal stimulus to support the economic recovery,” said Lee Hardman, currency analyst at MUFG.

The common currency was also supported by a survey showing German investor sentiment improved much more than expected in May as concerns eased about the impact of the coronavirus pandemic on Europe’s largest economy.

The greenback found little support from data showing U.S. homebuilding dropped by the most on record in April.

The U.S. currency, which draws safe-haven flows when risk appetite falls, has assumed a softer tone as investors took heart from encouraging early-stage data for a potential coronavirus vaccine.

“The USD is a safe haven just like the CHF or JPY and it was safe havens under pressure from yesterday morning straight through to now,” said Brad Bechtel, global head of FX at Jefferies.

Governments scaling back lockdown restrictions has also helped investors grow optimistic that economies could soon return to normal.

The Australian and New Zealand dollars hung onto hefty gains on Tuesday amid progress on reopening the global economy and optimism about an eventual vaccine.

Against the Japanese yen, which tends to draw investors during times of geopolitical or financial stress as Japan is the world’s biggest creditor nation, the dollar rose 0.55% to a near one-month high.

The pound rose 0.49% against the dollar, a small recovery relative to its recent seven-week lows, as sterling is held down by Brexit risks and speculation about negative rates.

Reporting by Saqib Iqbal Ahmed; Additional reporting by Olga Cotaga in London; Editing by Dan Grebler

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