(Adds Deutsche Bank note on volatility)
* Attention back on tightening monetary outlook for Europe,
* Yen, Swiss franc both suffer
* Aussie dollar falls again after weak retail sales
* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh
By Patrick Graham
LONDON, May 9 Currency markets swung back to
bets on improving growth and tighter monetary policy on Tuesday,
lifting the dollar and euro against traditional safe havens for
capital including the yen and the Swiss franc.
Emmanuel Macron's election as French president on Sunday
turned attention away from the political concerns on both sides
of the Atlantic that have dominated currency markets this year,
and U.S. and European yields were broadly higher in morning
The interest rate premium investors get for holding dollar
10-year government bonds instead of their yen equivalents rose
to its highest since the end of March overnight and German Bund
yields were also higher.
"We are going back to trading diverging monetary policy,"
said Athanasios Vamvakidis, head of G10 currency strategy at
Bank of America Merrill Lynch in London.
"The market has priced in a 75 to 80 percent chance of a
U.S. rate hike in June. At the same time the market expects that
the (European Central Bank) will start tapering later this year.
So both the euro and dollar should do well against the yen."
The dollar gained half a percent to 113.80 yen and
the euro around a quarter of a percent to 123.99 yen.
The Swiss franc, another currency with firmly negative
interest rates as well as a central bank actively seeking to
weaken it with market intervention, fell to its lowest against
the euro since mid-October. It is down just over 2 percent
against the euro in the past fortnight, compared to an almost 3
percent fall in the dollar.
Market measures of volatility for euro-dollar rates have
reached their lowest for three years in the past week
and Deutsche Bank strategist Oliver Harvey warned in a note on
Tuesday of the risks of a turn in that trend.
"One of the main themes this year has been the fall in
vol(ume)... but there are increasing signs a turning point is
close," he said, pointing both to the risks of more downbeat
signals on global growth and the chances of the Fed outpacing
expectations on future policy moves.
With the pricing for a U.S. Federal Reserve rate rise in
June about as firm as markets tend to get ahead of the event
itself, it was a bounce for the dollar that dominated morning
trade in Europe.
The euro dipped back below $1.09, down more than a cent down
from 6-month highs hit after Macron's victory on Sunday.
The Australian dollar sank more than half a percent after
another batch of soft retail sales numbers pointed to more
weakness in a domestic economy struggling to find a solid basis
"From here you have to balance two competing factors: the
outlook in Europe looks good and that is encouraging investors
who had held off previously to buy European equities on an
unhedged basis," said Roger Hallam, Chief Investment Officer for
currencies at JP Morgan Asset Management in London.
"The flip side is that relative yield developments do not
point to a stronger euro (against the dollar). It actually looks
Still, the euro zone's GDP growth in the first quarter, due
next week, is expected to have outpaced anaemic 0.7 percent
growth in the United States in the same period. Inflation jumped
back to 1.9 percent in April.
ECB board member Yves Mersch said on Monday that the central
bank is close to replacing its negative view with a neutral one
on whether the euro zone economy will reach growth targets, and
should adjust its policy guidance accordingly.
ECB chief Mario Draghi is due to speak to the Dutch
parliament on Wednesday.
For Reuters Live Markets blog on European and UK stock
markets see reuters://realtime/verb=Open/url=http://emea1.apps.cp.extranet.thomsonreuters.biz/cms/?pageId=livemarkets
(Additional reporting by Hideyuki Sano in TOKYO; Editing by