Euro Falters After Eclipsing Key Level as ECB’s Lane Weighs In
Euro Rises Above Key $1.20 Level for First Time Since May 2018
(Bloomberg) -- The euro broke above $1.20 for the first time in more than two years and then struggled to maintain its momentum, pressured in part after a European Central Bank official said the exchange rate matters for the region’s economy.
Europe’s common currency touched $1.2011 on Tuesday, its highest since May 2018, before tumbling back to $1.1907, or 0.3% lower on the day. Options-related selling around the day’s highs and a rebound in the dollar helped fuel the reversal, as did ECB member Philip Lane’s comment that euro’s level “does matter” for monetary policy.
Investors have been piling into the euro for weeks, with speculators holding a record bullish futures position as of a week ago. The shared currency has rallied 12% since its March lows. The European Union’s response to the virus has supported the euro, while the Federal Reserve’s move to slash rates to zero and inject massive amounts of liquidity undermined the dollar by shrinking the U.S. yield advantage.
Lane’s remarks represent the “first real push back from the ECB on the exchange rate’s appreciation,” said Shaun Osborne, chief foreign-exchange strategist at Scotiabank. “The market is very, very long euro. We might be setting up for a test of $1.1750.”
The euro’s gain isn’t necessarily beneficial for the region. Consumer prices in the euro area are falling for the first time in four years, which is likely to trouble ECB policy makers. A stronger currency generally limits inflation by tamping down import prices.
“We have an inflation mandate and we care about the overall performance of the European economy,” Lane said in an online discussion. “We’ve seen a repricing in recent weeks” in the euro-dollar exchange rate “to some degree.”
The euro sank to as low as $1.0636 in March, its weakest in about three years. It’s now attempting to extend a four-month rally, and some analysts don’t see it straying far from current levels.
“Euro-dollar may trade around the $1.20 level for a while,” said Chris Turner, a currency strategist at ING Groep NV. The move will be helped by “a broad dollar decline as U.S. real yields move deeper into negative territory.”
Just last week, the Fed announced a policy shift that’s likely to keep rates lower for longer and the greenback under pressure. The Bloomberg Dollar Spot Index touched a two-year low Tuesday before rebounding to trade little changed after stronger-than expected U.S. manufacturing data.
Ten-year U.S. real yields, which strip out inflation, are near record lows at about minus 1.1%, less than 15 basis points above their German counterparts. That advantage was above 100 basis points as recently as March.
November Thoughts
And then there’s the U.S. election, which is now around two months away, and which many analysts say could pose another headwind for the greenback.
“The U.S. election is providing further uncertainty over U.S. economic policy,” contributing to a weaker dollar, said Jordan Rochester, an FX strategist at Nomura International.
For Alan Ruskin, chief international strategist at Deutsche Bank, the euro rally has history on its side.
“From 2003 to 2018, the euro spent every year except one at least briefly touching the 1.20s,” he said. There’s “nothing special in trading in a 1.20-1.25 range.”
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