Euro falls to 16-month low on fears of new COVID lockdown

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Euro falls to 16-month low on fears of new COVID lockdown

On Monday, the euro fell close to a 16 month low on growing concerns over the impact of new COVID 19 restrictions in Europe, with Austria starting a full lockdown and Germany considering following suit.

Austria had its fourth lockdown, the first since vaccines became widely available, shutting down Christmas markets, cafes and theatres.

A fourth wave of infections has plunged Germany, Europe's largest economy into a national emergency, health minister Jens Spahn said, warning that vaccinations alone will not cut case numbers.

The euro fell 0.25% to $1.122 at 0905 GMT, close to a 16 month low on Friday when Austria announced the lock down.

The Euro may be vulnerable this week, according to Chris Turner, global head of markets at ING, as a result of Pandemic-related risk premia have made an unwelcome return to European FX markets.

The European Central Bank has more reasons to go slow in tightening its policy because of the new lockdowns and pressure on the service sector in Europe, according to Turner.

The euro was 0.1% higher against sterling after it touched its lowest level against the UK currency since February 2020, as the market weighed Bank of England Governor Andrew Bailey's cautious comments on inflation over the weekend.

Markets believe that the BoE will become the first major central bank to raise rates since the start of the epidemic in order to tackle inflation that hit a 10 year high as household energy bills go up.

On Friday, the dollar got more support from bullish comments by Federal Reserve officials Richard Clarida and Christopher Waller, who suggested that a faster pace of stimulus tapering might be appropriate in light of the quickening recovery and heated inflation.

The dollar index, which gauges the currency against six major peers, was trading little changed at 96.141, keeping it within sight of the 16 month high of 96.266 last week.

The possibility of earlier interest rate increases was raised by a more rapid end to tapering.

The minutes of the Federal Open Market Committee meeting at the beginning of this month, when policymakers announced a start to tapering, are due Wednesday. They may give more insight into how many Fed officials are considering faster tapering or earlier rate increases.

U.S. President Joe Biden is expected to announce his nominee for Fed chair this week, after interviewing incumbent Jerome Powell and Fed governor Lael Brainard.