* Swedish crown rises to four-month high vs euro
* Graphic: World FX rates in 2019 http://tmsnrt.rs/2egbfVh
By Olga Cotaga and Saikat Chatterjee
LONDON, Nov 29 (Reuters) - The euro held near two-week lows
on Friday as a combination of record low currency market
volatility and hopes the United States and China would be able
defuse their damaging tariff war with a preliminary trade deal
boosted demand for the greenback.
Trading ranges in euro/dollar EUR= , the most liquid
currency pair in the world, were the narrowest in 20 years,
falling to around 20 pips on Monday, analysts at Nordea said. A
pip is the smallest price move a currency pair can make,
equivalent to the third decimal place for most currency pairs
and the fourth for the most liquid. As daily price swings have narrowed, expectations of future
currency market moves have also dropped, with three-month
implied volatility gauges for euro/dollar falling to 4.27%, the
lowest on record EUR3MO=FN , down from 7.16% in January.
The drop in currency market volatility has fuelled appetite
for carry trades where investors borrow in currencies with low
or negative interest rates and invest in relatively higher
yielding ones. So far in 2019, the euro has weakened more than
4% against the dollar.
"If any strategy has worked with some amount of reasonable
success in the currency markets this year, it is a carry-trade
one," said a sales trader at a European bank in London.
On Friday, the single currency EUR=EBS edged 0.1% lower to
$1.1003, just above $1.0993 hit earlier this week which was the
lowest since Nov. 14. Trading was quieter than usual with U.S.
markets shut overnight for the Thanksgiving holiday.
Broadly, the U.S. currency gained against its peers from
data showing the world's biggest economy is on a firm footing,
which prompted investors to scale back rate-cut bets.
U.S. economic growth picked up slightly in the third
quarter, data showed on Wednesday, in contrast to other
indicators pointing to a slowdown in global activity.
The Federal Reserve also flagged an upbeat outlook amid
signs of labour market strength and a possible turnaround in
business investment. Against a basket of currencies .DXY , the dollar was
broadly steady around 98.37, but set for the biggest monthly
gain since July.
Though data showed eurozone inflation accelerated faster
than expected in November on a rise in food and services prices,
annual inflation rates remained far lower than European Central
Bank expectations. "Any euphoria related to this is likely to be limited," said
Thu Lan Nguyen, a currency analyst at Commerzbank, noting that
the rise was due to the change in the calculation methodology.
Members of the European Central Bank are discussing the
potential for a new definition of the inflation target, which
now stands at below, but close to 2%.
The Chinese yuan -- the most sensitive currency to the
trade war -- was also flat and inside its recent range even as
China vowed to impose "firm countermeasures" after U.S.
President Donald Trump's approval of a bill backing Hong Kong's
pro-democracy protesters on Wednesday. China is yet to indicate
whether there would be any bearing on trade talks. Negotiators from the world two biggest economies have been
trying for weeks to hammer out a 'phase 1" trade deal, with
markets hoping an agreement could be signed before year-end.
"There seems to be pretty good optimism around the trade
talks going on between U.S. and China," said William O'Loughlin,
a portfolio manager at Rivkin Securities in Sydney.
"Though as we know that can change on a dime...the (dollar)
rally doesn't feel like a euphoric, super-bullish rally, it does
feel like climbing the wall of worry."
Elsewhere, the Swedish crown reached a four-month high
versus the euro at 10.51 EURSEK=D3 on the back of
better-than-expected third-quarter gross domestic product data.
After months of acute weakness, the Swedish currency started to
gain last month.
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