The U.S. dollar has slipped slightly in Europe Thursday in rangebound trading, but the focus may turn on to the euro with the European Union set to discuss the coronavirus outbreak.
At 2:55 AM ET (0655 GMT), the U.S. Dollar Index, which tracks the greenback against a basket of six other currencies, stood at 100.477, down 0.1%, while GBP/USD rose 0.2% to 1.2352 and EUR/USD at 1.0821, largely flat.. USD/JPY rose 0.1% to 107.81.
The euro will be in focus Thursday ahead of a EU council meeting to discuss the bloc’s response to the economic turmoil caused by the global coronavirus pandemic.
Nothing concrete is expected to emerge Thursday, given a senior EU official was noted saying that EU council president Charles Michel will not attempt to reach a deal today. This follows the heated disagreement between the group’s finance ministers on the touchy subject of a joint debt measure, often called coronabonds, to pay for the economic refinancing of the bloc.
This uncertainty can’t be good for the single currency.
The European Central Bank moved late Wednesday to ease some of the pressure on the Italian debt markets by agreeing to exempt bonds that are downgraded to junk from its normal requirement that bonds used for collateral should have an investment grade rating.
“The move from the ECB is well-timed if we do not see an EU deal today on corona bonds/recovery fund. Hence, the negative market impact of no new deal today is set to be smaller than feared,” said analysts at Danske Bank, in a research note.
The spreads between benchmark German bonds and Italian debt, in particular, have been widening amid concerns that Italy will struggle to afford the cost of rebuilding its economy at the same time as servicing its hefty debt pile.
Italy defaulting on its debt would create enormous tensions within the European Union project, threatening the very existence of the single currency.
Italy is up for review by rating agency S&P on Friday, and although a one notch downgrade from its current BBB rating would still keep it in the investment grade camp, it would be only just.
“The risk of Italy being downgraded to junk later this year together with a rising number of ‘fallen-angel’ Eurozone corporate bonds that lost their investment grade rating, were probably the main reasons why the ECB changed the collateral rules last night,” added Danske Bank.
The PMI data for the European Union are due for release later Thursday.
“It will be an ugly reading but the expectations components could be interesting for any signs that governments’ fiscal measures are alleviating some of the pressure,” said Danske.
