Janice R. Andrews
The euro has been going up amazingly fast this August. On Wednesday, it hit a one-year high against the US dollar. People around the world are paying attention to this rise in the value of the euro because the pair of currencies trades for about $2.29 trillion every day, which is about a third of all foreign exchange volume. The euro-dollar pair is a popular way for traders who are negative about the US economy to do business because it is easy for sellers to find buyers and buyers to find sellers.
Money managers have been betting for a few weeks now that the Federal Reserve is about to start a run of interest rate cuts. This has made a lot of people want to buy euros. With an eye on more than $45 trillion in assets, Bank of New York Mellon is the world’s biggest reserve bank. For the past two weeks, these money managers have been buying euros every day.
Also, robo-traders have lost between $70 billion and $80 billion in trades this month alone. These traders use computer programs to follow market trends. According to UBS AG, this trend has been very good for the euro, which has helped its rise even more. Since the beginning of August, the euro has gone up about 3%. On Wednesday, it hit a high point of $1.1143, which was its highest level since July of last year. The euro got an extra boost from revised US jobs figures, which made it more likely that the Fed would lower interest rates.
The euro’s upward trend may be in danger, though, as the world’s central bankers meet for the yearly Jackson Hole conference. European growth is still slow, and a lot of people are worried that the euro’s recent wins might not last. Experts in the market say that all it would take to turn around the euro’s prospects is for Federal Reserve Chair Jerome Powell or his colleagues to sound careful. If Powell goes against what the market thinks will happen and doesn’t lower rates, it could mean that US rates will stay higher than those in Europe, where rate cuts have already started. This would make the dollar look better and could stop the euro’s rise.
Geoff Yu, a senior strategist at Bank of New York Mellon, says that the recent gains in the euro are more due to hopes for higher US interest rates and a greater willingness to take risks than to a good view for the eurozone. “It’s not an outright euro-positive story; the current macro picture for Europe remains very weak,” he said.
The euro may be stronger because it is easier to exchange than because the economy of the region has gotten better in general. “This is more of a dollar weakness story than a strong euro story,” says Stephen Jen, CEO of Eurizon SLJ Capital. “The fundamentals of the euro haven’t changed much.”
In fact, there are more and more signs of economic trouble across the eurozone. For example, trust has dropped a lot in Germany, which has the bloc’s biggest economy. Growth risks have made it even more important for the European Central Bank (ECB) to start loosening monetary policy again when it meets next month.
At the moment, the eurozone’s economic problems aren’t being seen because of hopes of a quick drop in US interest rates. But this might not last. In the past six weeks, quantitative models from Aspect Capital Ltd have changed their position on the euro from short to long. On the other hand, Mount Lucas Management LLC thinks the currency could go up to $1.20. But Elias Haddad, a senior markets analyst at Brown Brothers Harriman, says the euro will almost certainly lose some of its gains if the Fed slows down less than the ECB.
According to Haddad, the markets may be too negative about the US economy. “We continue to believe that the divergence story remains in place and should continue to support the dollar,” he said. As Powell’s speech draws near, the euro’s recent rise is in danger, and traders are keeping a close eye out for any signs that could stop its recent gains.
