The euro clung to most of its recent gains on Monday while the dollar struggled against a broad swathe of currencies and itstrade-weighted basket approached a 2-1/2 year low.
It suffered from a rush to unwind currency bets following North Korea’s latest nuclear tests.
Both the Japanese yen JPY= and the Swiss franc CHF= notched up gains against the dollar after news on Sunday of North Korea's sixth and most powerful nuclear test, prompting the United States to warn of a "massive" military response if it or its allies were threatened.
Even the Chinese currency traded in the overseas market CNH= rose to a 15-month high against the U.S. dollar on Monday.
The euro EUR=EBS rose half a percent against the dollar to $1.19 and not far away from a 2-1/2 year high above $1.20 hit last Tuesday. It is up more than 13 percent against the dollar this year and is the best performing currency in the G10 space.
The euro’s price action on Monday was all the more surprising given the overhang of long bets on the single currency that have grown rapidly this year and before the European Central Bank policy meeting this week.
Morgan Stanley strategists do not expect any pushback from ECB policymakers on the euro’s strength as the currency has been rising on the back of strengthening economic fundamentals.
Moreover, the ECB has a noticeable bias of talking about the currency when it is on a weaker trajectory, according to data-mining of all the ECB policy statements and news conferences since 1998.
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