PARIS — As recently as March, the dollar was looking so strong against the euro that the only question seemed to be how soon the eurozone currency would sink to parity.
But the euro has been on a rebound, and on Thursday, it reached a three-month high against the American currency, rising above $1.14. What happened, and what do recent fluctuations say about the American and eurozone economies?
“The original argument for the dollar strengthening was one of divergence,” said Alan Ruskin, head of foreign exchange strategy at Deutsche Bank in New York.
While things developed largely as expected on the side of the European Central Bank, he noted, the American narrative has not held up as well.
The euro, used by 19 countries, began falling in the second half of last year after alarm about deflationary pressures pushed the European Central Bank toward a policy of quantitative easing.
The central bank has committed to buying 60 billion euros, or about $67.6 billion, worth of bonds each month through September 2016.
That central bank program, which has the effect of driving down yields on eurozone government bonds, sent investors scurrying to capital markets in the United States in search of higher returns, especially because the Federal Reserve had been expected to begin moving to raise interest rates from near zero.
That wave of dollar-buying helped to drive a big rally the American currency, which gained sharply against most of its counterparts.
But the euro, which fell as low as $1.0458 on March 16, has been clawing its way back. On Thursday it was trading at $1.1415, up 0.5 percent on the day and the highest level since February.
The euro is not the only currency rising; the dollar has given up ground more broadly, losing about 5 percent of its value against a basket of currencies over the same period.
Mr. Ruskin said that the dollar’s rally began to lose steam after officials of the Federal Open Market Committee, the Fed’s policy-making body, pointedly noted at their March meeting that American exporters could be hurt by a strong currency.
But even before that, Mr. Ruskin said, weaker-than-expected economic data had begun to undercut the case for the Fed to increase key lending rates.
Another factor behind the change of direction is that the yields on many European government bonds, which had fallen into negative territory amid fears that deflation would take hold, have begun to spike higher, making short-term European assets more attractive and encouraging capital to flow back into the euro.
For example, the yield on the German 10-year bond, a eurozone benchmark, which fell nearly to zero last month, stood at more than 0.7 percent. (Yields move in the opposite direction of prices.)
The fall in the euro, which makes it easier for exporters to compete overseas, is one of the factors — along with lower oil prices and lower interest rates — that economists have cited for the eurozone’s relatively strong first-quarter growth.
If the euro continues gaining, it might sap some of that energy.Two reports released on Wednesday set off a new round of dollar-selling. First, data from Eurostat, the European statistical agency, showed that the eurozone economy greatly outpaced the United States economy in the first quarter, growing at a 1.6 percent annualized pace.
The American economy registered a 0.2 percent gain in the period, but revised figures are expected to show that it actually contracted. Second, a report from the Commerce Department showed that retail sales were flat in April, confounding expectations of a gain.
Taken together, the data made it appear unlikely that the Fed would tighten monetary policy before the autumn, at the earliest, economists say. Phyllis Papadavid, a senior foreign exchange strategist at BNP Paribas in London, warned against looking to Europe for an explanation of the dollar’s downturn.
Despite some positive signs, she said, the Continent’s economy remains in the doldrums, with high unemployment likely to continue weighing on growth. “It’s a broader dollar move that we’re seeing in the light of the disappointing data out of the U.S.,” she said.
“This isn’t a euro move.” Momentum currently favors euro buying, Ms. Papadavid said, but she added that she expected the United States economy to pick up steam in the second quarter, eventually bringing the dollar back into favor.
For all the volatility in the market, the euro has a long way to go before it reaches its levels of May 2014, when it was trading above $1.39, and Ms. Papadavid said there was little chance of its reaching that level anytime soon. “I’d be very, very surprised to see that kind of move,” she said.
nytimes.com
But the euro has been on a rebound, and on Thursday, it reached a three-month high against the American currency, rising above $1.14. What happened, and what do recent fluctuations say about the American and eurozone economies?
“The original argument for the dollar strengthening was one of divergence,” said Alan Ruskin, head of foreign exchange strategy at Deutsche Bank in New York.
While things developed largely as expected on the side of the European Central Bank, he noted, the American narrative has not held up as well.
The euro, used by 19 countries, began falling in the second half of last year after alarm about deflationary pressures pushed the European Central Bank toward a policy of quantitative easing.
The central bank has committed to buying 60 billion euros, or about $67.6 billion, worth of bonds each month through September 2016.
That central bank program, which has the effect of driving down yields on eurozone government bonds, sent investors scurrying to capital markets in the United States in search of higher returns, especially because the Federal Reserve had been expected to begin moving to raise interest rates from near zero.
That wave of dollar-buying helped to drive a big rally the American currency, which gained sharply against most of its counterparts.
But the euro, which fell as low as $1.0458 on March 16, has been clawing its way back. On Thursday it was trading at $1.1415, up 0.5 percent on the day and the highest level since February.
The euro is not the only currency rising; the dollar has given up ground more broadly, losing about 5 percent of its value against a basket of currencies over the same period.
Mr. Ruskin said that the dollar’s rally began to lose steam after officials of the Federal Open Market Committee, the Fed’s policy-making body, pointedly noted at their March meeting that American exporters could be hurt by a strong currency.
But even before that, Mr. Ruskin said, weaker-than-expected economic data had begun to undercut the case for the Fed to increase key lending rates.
Another factor behind the change of direction is that the yields on many European government bonds, which had fallen into negative territory amid fears that deflation would take hold, have begun to spike higher, making short-term European assets more attractive and encouraging capital to flow back into the euro.
For example, the yield on the German 10-year bond, a eurozone benchmark, which fell nearly to zero last month, stood at more than 0.7 percent. (Yields move in the opposite direction of prices.)
The fall in the euro, which makes it easier for exporters to compete overseas, is one of the factors — along with lower oil prices and lower interest rates — that economists have cited for the eurozone’s relatively strong first-quarter growth.
If the euro continues gaining, it might sap some of that energy.Two reports released on Wednesday set off a new round of dollar-selling. First, data from Eurostat, the European statistical agency, showed that the eurozone economy greatly outpaced the United States economy in the first quarter, growing at a 1.6 percent annualized pace.
The American economy registered a 0.2 percent gain in the period, but revised figures are expected to show that it actually contracted. Second, a report from the Commerce Department showed that retail sales were flat in April, confounding expectations of a gain.
Taken together, the data made it appear unlikely that the Fed would tighten monetary policy before the autumn, at the earliest, economists say. Phyllis Papadavid, a senior foreign exchange strategist at BNP Paribas in London, warned against looking to Europe for an explanation of the dollar’s downturn.
Despite some positive signs, she said, the Continent’s economy remains in the doldrums, with high unemployment likely to continue weighing on growth. “It’s a broader dollar move that we’re seeing in the light of the disappointing data out of the U.S.,” she said.
“This isn’t a euro move.” Momentum currently favors euro buying, Ms. Papadavid said, but she added that she expected the United States economy to pick up steam in the second quarter, eventually bringing the dollar back into favor.
For all the volatility in the market, the euro has a long way to go before it reaches its levels of May 2014, when it was trading above $1.39, and Ms. Papadavid said there was little chance of its reaching that level anytime soon. “I’d be very, very surprised to see that kind of move,” she said.
nytimes.com
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