FOREX-Euro, sterling jump, dollar tumbles as market turns to risk assets

By Joice Alves

LONDON, Nov 7 (Reuters) -

Euro and sterling rose against the safe-haven U.S. dollar on Monday, supported by a risk-on sentiment across markets with European stocks rising on persistent hopes China will ease COVID restrictions.

A survey showed on Monday that investor morale in the euro zone improved in November, the first time it rose in three months, reflecting hopes that recent warmer temperatures and falling energy prices will prevent gas rationing on the continent this winter.

In the meantime, the pan European STOXX 600 index rose 0.65% with traders pointing out that investors are still betting China will ease its coronavirus measures, despite officials saying they plan to keep the zero-COVID policy, which includes lockdowns, quarantining and rigorous testing.

Against a basket of currencies, the U.S. dollar index fell 0.5% to 110.53. It had lost almost 2% at the end of last week after reports that China would make substantial changes to its COVID-19 policy in coming months.

"The risk on sentiment was obvious in the tail end of last week as speculators pounced on reports that China could review its zero-COVID policy," said Jane Foley, head of FX strategy at Rabobank in London.

But on Monday the offshore yuan fell 0.8% against the dollar to 7.2318 after China said over the weekend that it will persevere with its "dynamic-clearing" approach to COVID-19 cases as soon as they emerge, giving little indication it would ease its outlier zero-COVID strategy nearly three years into the pandemic.

"The mixed newsflow suggests the potential for volatile conditions, however, we would view it as too early for the dollar to enter a sustained sell-off," Rabobank's Foley added.

RISK ON

The risk-sensitive Australian and New Zealand dollars fell sharply in Asia trade. , but they recovered as European markets opened.

Another risk-sensitive currency, sterling, reversed earlier losses to trade up 0.6% to $1.1442, while the euro jumped to its highest since Oct. 27. It was last up 0.23% to $0.9982.

Investors were also assessing Friday's U.S. jobs report which showed that firms added a more-than-expected 261,000 jobs in October and hourly wages continued to rise, evidence of a still-tight labour market.

But hints of some easing of market conditions, with the unemployment rate rising to 3.7%, fuelled hopes that the much sought-after Federal Reserve pivot could be on the horizon, capping potential gains for the dollar.

Four Fed policymakers on Friday also indicated they would still consider a smaller interest rate hike at their next policy meeting.

Fed funds futures now show that markets are pricing in a 67% chance of a 50-basis-point rate hike at the Fed's December meeting, with the next key data point being Thursday's U.S. inflation figures.

In China, the economic impact of the country's zero-COVID policy was again highlighted in its trade figures released on Monday, which showed exports and imports unexpectedly contracted in October, the first simultaneous slump since May 2020.

(Reporting by Joice Alves in London; Editing by Ed Osmond and Chizu Nomiyama)