- German coalition talks seen as having limited impact
- Dollar drifts in tight ranges in sparse data week
The euro steadied on Tuesday after notching up its biggest fall in nearly a month in the previous session as investors shrugged aside concerns of any fallout from the German political deadlock for now.
With core bond yield spreads tightening and benchmark European stock indexes trading well within recent ranges, markets are focusing on the steady drip of positive data coming out of the eurozone.
“Politics is not much of a concern for now and I think the euro may only weaken now if it seems that Merkel herself may be a casualty of this fallout,” said John Marley, head of FX strategy at Infinity International, a currency risk management firm.
The single currency rose 0.1 percent to $1.1749 on Tuesday after falling half a percent on Monday, its biggest daily fall since Oct. 26.
With growth from the bloc exceeding the United States in the third quarter, led by largest economy Germany, the single currency has recovered from earlier lows and investors were becoming more comfortable in holding European assets.
Morgan Stanley strategists said the rebound in European assets point to the underlying strength of the economy and the risk-absorbing capacity of loose global equity conditions when trading political risk factors.
Derivatives markets pointed to further upside for the euro with risk reversals still at elevated levels while implied volatility gauges holding near 2017 lows.
Elsewhere, the dollar gave back some of its gains in Asian trading on Tuesday but stuck close to a one-week high against a basket of currencies as a German political deadlock continued to pressure the euro.
The dollar index, which tracks the greenback against a basket of six major rival currencies, was broadly flat at 94.00 , but was still within sight of its overnight peak of 94.104, its highest since Nov. 14.
The U.S. data calendar is relatively sparse ahead of the Thanksgiving holiday, with Federal Reserve Chair Janet Yellen scheduled to give a speech later on Tuesday. Minutes from the Fed’s November meeting will be released on Wednesday.