The euro on Tuesday roared past the $1.20 mark for the first time in more than two-and-a-half years, with investors remaining upbeat on the currency bloc’s economy and concerned that a hurricane that struck the US might weigh on America’s growth rate.
The common currency climbed to as high as $1.2016 in early European trading. It has not been at that level since January 2015.
Investors’ views on the dollar weakened on Tuesday as economists worked to gauge the effects of Hurricane Harvey that wreaked havoc over the weekend in Texas. “The knock-on effects suggest dampened [third quarter] US growth that may see the Fed deciding against raising interest rates again in 2017,” said ING analyst Chris Turner.
While this may be too early to call, we do expect this thinking to weigh on the dollar in the near-term – especially as our economists believe that US activity data is unlikely to surprise to the upside, such that it could more than offset any external shock caused by the hurricane in Texas.
Simon Derrick at BNY Mellon notes that the dollar index is at its weakest point since May last year.
Investors may well be wondering whether it is now time to officially call the end of the third great dollar rally since the Nixon shock.
This all creates a conundrum for the European Central Bank, which is keenly aware that a rising euro threatens to knock back inflation. The currency has been cranking higher ever since ECB chief Mario Draghi’s famously hawkish turn in his Sintra speech in late June.
Frederik Ducrozet at Pictet (source of the chart above) writes:
Officially, the euro is not a policy target. The ECB only considers the currency insofar as changes in its value affect price stability over the medium term, although in the crisis years, concerns over an “unwarranted tightening” of financial conditions led to implicit FX targeting, culminating in Mario Draghi’s ‘three contingencies’ speech in Amsterdam in April 2014.
This time is different. Draghi’s assessment in Sintra that “deflationary forces have been replaced by reflationary ones” is increasingly backed by the data. Although a stronger euro may complicate the ECB’s exit, it should not derail it, all the more since the currency is appreciating “for good reasons”.
You can read Fred’s full note here.
To the chagrin of Brits still lucky enough to be on holiday by the Med, the euro has also taken a fresh bite out of sterling, reaching a high of £0.9292, up by 0.3 per cent on the day. The trend here for the pound is pretty clear:
(Top chart: Bloomberg)