Euro below $1.10 as investors refocus on diverging interest rates

Frankfurt (July 14)  The euro inched towards a six-week low against the dollar on Tuesday, staying below $1.10 as investors switched their focus away from Greece and back towards diverging U.S. and euro zone monetary policy.

As oil fell after Iran and major world powers reached an historic nuclear deal that will grant Tehran sanctions relief in exchange for curbs on its nuclear programme, oil-rich Canada's dollar hit a four-month low CAD=D4.

With Greece's debt saga off centre-stage - at least temporarily - after the almost-bankrupt country and its creditors agreed to a deal for a third bailout, the spotlight returned to when the U.S. Federal Reserve will begin hiking interest rates.

Investors expect the Fed to start raising rates later this year, in stark contrast to the European Central Bank and the Bank of Japan, both of which are seen continuing with their ultra-loose monetary policies for the foreseeable future.

The euro was 0.1 percent down at $1.0992 EUR= after shedding about 1.5 percent on Monday after the Greek deal. That brought it in sight of a six-week low of $1.0915 EUR=.


"There is still implementation risk, and (Greek Prime Minister Alexis) Tsipras still has to sell it at home ... but I was speaking to many clients yesterday and there is a shift in focus ... to more fundamental market drivers," said Credit Agricole FX strategist Manuel Oliveri in London.

The common currency slid to a 12-year low of $1.0457 EUR= in March when the ECB launched its quantitative easing policy. But it spent much of the past two months above $1.11 as talks between Greece and its creditors dragged on.


The dollar hit a 12-day high against the yen, which lost its safe-haven appeal with the worst-case-scenario of Greece exiting the euro seemingly averted, at 123.74 yen JPY=.

Investors will get a chance to hear the latest Fed thinking when Chair Janet Yellen gives her semi-annual testimony to Congress later this week. Dollar bulls had been given some fodder on Friday when Yellen said she expected a rate hike at some point this year.

"The dollar should have a relatively easy time topping 124 yen, especially if Yellen sounds hawkish during the testimony," said Junichi Ishikawa, market analyst at IG Securities in Tokyo.


"Breaching 125 yen, however, is a different story. Japanese authorities have spoken out when the dollar nears 125," he said, adding that another factor to watch is volatility in Chinese stocks.

As oil prices fell, the Canadian dollar dropped to C$1.2800 against its U.S. counterpart, its weakest since mid-March, while fellow oil-producer Norway's crown also fell EURNOK=D3.

Source: Reuters