Those who trade forex might benefit from learning about the recent surge in the EUR/USD to its highest level in more than two years.
The euro rose to as much as $1.3893 on Dec. 27, which was its highest level since Oct. 31, 2011, according to Bloomberg News. The appreciation in the common currency relative to the dollar was attributed to statements that European Central Bank Governing Council member Jens Weidmann made when speaking with the German newspaper Bild.
Several measures that compare the value of the greenback to other currencies also dropped, MarketWatch reported. The WSJ Dollar Index declined to 73.66 from its prior reading of 73.92. In addition, the ICE dollar index fell to 79.983, from 80.488 late in the previous day in North America.
Impact of Weidmann statement
“We must take care to raise interest rates again in a timely manner should inflation pressures build,” the paper quoted Weidmann as saying, according to Bloomberg News. “The euro area is recovering only gradually from the most severe economic crisis in the postwar period; pricing risks are slight. That justifies low benchmark rates.”
At least one market expert noted the key importance of the statements made by this government official, the media outlet reported. John Hardy, who works for Saxo Bank A/S in Copenhagen as head of foreign-exchange strategy, told the news source about this impact.
“The euro is trading to new highs since late 2011 on a Weidmann interview, in which he talks up the risks of ‘arbitrary monetary policy easing’ and the need to hike rates quickly if inflation returns,” he told the news source. “Illiquid holiday trading” is helping to make these fluctuations more severe, he emphasized.
Hardy is certainly not the only individual who observed the impact that the lack of trading activity has had on the price movements of the euro, as traders indicated that the lack of liquidity helped make these fluctuations in value more severe, according to Reuters.
EU banks prepare for AQR
Another factor that some have cited as helping to drive up demand for the common currency is lenders in the European Union making an effort to bolster their existing balance sheets so that they can be ready for an assessment that the ECB plans to conduct at the end of this year, according to Reuters.
Traders have told the news source that because these organizations want to improve their existing position, this objective has helped support demand for the euro. The evaluation is being conducted so that the region’s central bank can perform an asset-quality review early in 2014. The AQR will be conducted by the ECB so that the financial institution can pinpoint the banks in the region that need additional capital.
Impact of Fed tapering
Another factor that helped to push the EUR/USD higher in value by moving the greenback lower was speculation that the even though the Federal Reserve recently announced a timeline for reducing its bond purchases, the central bank will likely not increase its interest rates for some time, according to Bloomberg News.
At the end of the most recent meeting of the Federal Open Market Committee, it was revealed that starting in January, the Fed will start buying $75 billion worth of bonds every month. This figure compares to the $85 billion that the central bank has been purchasing every month since late in 2012.
As a result, the balance sheet of the central bank, which has surpassed $4 trillion, will continue to grow, although at a slightly reduced pace. This announcement was made at a time when the ECB has pulled back in terms of making bond purchases.
“The Fed did decide to taper, but the amount was minimal and we have yet to see what the policy outlook will be going forward,” Marito Ueda, senior managing director at currency-margin company at Tokyo-based FX Prime Corp., told Bloomberg. “Some bets on dollar gains are being unwound into year-end. The dollar is being sold across the board.”
The amount of time that the central bank will use to eliminate bond purchases entirely remains to be seen. Ben Bernanke, chairman of the Fed, shocked markets earlier this year when he announced at the conclusion of a policy meeting in June that these bond purchases could potentially be cut off altogether as early as 2014. This statement caused a sell-off that resulted in the decline of the value of many different assets.
He later provided some context around these statements, testifying before Washington lawmakers that for the bond purchases to be reduced, there would need to be significant improvement in crucial indicators of the economy. Since Bernanke made such statements, there has been substantial speculation circulating surrounding the timeline that the Fed will use to wind down its bond purchases.
Those who trade forex might benefit from knowing about a recent poll conducted by Bloomberg, in which economists predicted that the bond purchases of the Fed will be lowered at each one of the next seven FOMC meetings – by $10 billion per event.
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