May 20, 2020 / 10:49 AM / 6 days ago

FOREX-Euro advances towards 2-week highs on EU common fund proposal

* Graphic: World FX rates in 2019 tmsnrt.rs/2egbfVh

By Saikat Chatterjee

LONDON, May 20 (Reuters) - The euro extended gains on Wednesday, climbing towards a two-week high, as a Franco-German proposal for a common fund that could move Europe closer to a fiscal union boosted demand for the currency.

But the euro’s gains were hardly broad based with the single currency giving up ground against the perceived safe-haven Swiss franc as the size of the proposed fund is seen as being relatively small compared to the size of some of some European economies.

The euro edged up 0.2% to $1.0960, near to a two-week peak of $1.09755 reached on Tuesday. Breaking that level could open the way for a test of its May 1 high of $1.1019.

“It is a sign that major players are getting serious about pushing the limits toward what we think will inevitably be needed: region-wide fiscal spending to offset the costs of the crisis,” John Velis, an FX strategist at BNY Mellon said, referring to the Franco-German proposal.

France and Germany have proposed a 500 billion euro ($543 billion) Recovery Fund to offer grants to regions and sectors hit hardest by the coronavirus pandemic and to allow borrowing by the European Commission on behalf of the whole EU.

But the proposal may not be enough to push the euro above the $1.10 level against the U.S. dollar as developments in Germany suggested some push-back against more policy easing.

Earlier this month, a German constitutional court ordered the European Central Bank to justify its bond-buying scheme - the central plank in the region’s response to the economic crisis.

These issues helped to pushed the Swiss franc higher against the euro and the U.S. dollar despite heavy intervention by the Swiss central bank, suggesting that investors remain broadly cautious.

Broader currency market volatility fell to its lowest level in more than two months as investors waited for the outcome of the Federal Reserve’s policy minutes from its last meeting .

Elsewhere, New Zealand central bank chief Adrian Orr backtracked a little from the possibility of negative rates – a prospect he had flagged just days before – lending support to the kiwi dollar.

The euro’s modest gains pushed the U.S. dollar on to the back foot, with the U.S. currency holding near a three-week low of 99.225 hit in the previous session.

Reporting by Saikat Chatterjee; Additional reporting by Hideyuki Sano in TOKYO; Editing by Gareth Jones and Jane Merriman

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