Forex
Wait-and-see ECB boosts euro comeback as King Dollar’s crown slips
By Naomi Rovnick and Dhara Ranasinghe
LONDON (Reuters) -Traders on Thursday kept the euro on course for a strong comeback as prospects for the European Central Bank turning cautious after an expected second rate cut in September swept anxiety about French politics out of the currency’s path.
With global markets lined up for quick-fire U.S. rate cuts, the ECB signalled heightened concerns about volatile inflation, helping to sustain an upward shift for the euro that is near four-month highs after being shaken by French government turmoil in June.
The ECB left its deposit rate unchanged at 3.75% after lowering it from 4% in June for the first time in five years and president Christine Lagarde stressed it was not committed to a particular rate path.
By contrast, Federal Reserve chief Jerome Powell on Monday said he felt more confident U.S. inflation truly had moderated.
That has helped, at least temporarily, to bolster the euro, boosting the currency more than 2% against the dollar so far this month after a roughly 1% drop in June.
The euro was trading at around $1.093 on Thursday, down a touch on the day but still heading for its biggest monthly jump since November.
“Extreme scenarios around French political risk are abating and markets are convinced the Fed will be cutting rates soon and we’ve started to see softness for the dollar against most currencies,” said Lombard Odier macro strategist Bill Papadakis.
But the euro has slipped against the Swiss franc and sterling this month. And investors warned that the euro was not a straight bet should Donald Trump win U.S. presidential elections in November. Trump has proposed import tariffs that could hurt the euro zone economy, revive U.S. inflation and send U.S. rates and the dollar higher.
“We expect the euro zone-to U.S. interest rate differential to shrink which should lead to some dollar depreciation,” said Amelie Derambure, a multi-asset portfolio manager at Amundi.
“But markets see a Trump victory as a dollar-bullish event and so until the election the depreciation will be limited.”
CURRENCY COMEBACK ASSURED?
Money markets are pricing in more than two rate cuts from the Fed by year-end and just under two for the ECB.
The dollar has stood tall over most of its rivals for most of the past year, but is seeing its crown slip as interest rate support fades. The index that measures the dollar against major peers is 2% lower in July so far.
The euro, meanwhile, has recovered from a fall in June, when it hit two-month lows against the dollar, as French President Emmanuel Macron’s snap parliamentary election created political instability at the heart of the euro zone and pulled France’s deep budget deficit into focus.
Prospects of euro zone members wrangling over a French fiscal emergency in June revived memories of past euro sovereign debt crises pulling the common currency project close to the brink of collapse.
That fear is fading, with the extra income yield traders demand to hold French 10-year bonds over their German equivalents now about 65 bps, after surging briefly in June to a 14-year high of 85 bps.
“Our view is that (the ECB) will cut in September and again in the fourth quarter, but they are in a slow rate cutting cycle,” said David Zahn, head of European fixed income at Franklin Templeton.
SLOWDOWN RISKS
Lagarde on Thursday hinted she was concerned about euro zone growth in the context of potential global trade wars.
Trump’s pledge to hike import tariffs was a serious risk for the currency bloc’s export-focused economy, Edmond de Rothschild Asset Management CIO Benjamin Melman said.
“China is at the forefront because this has more political impact but Europe can also be an easy target,” he said.
Melman, who expects the ECB deposit rate to be no higher than 2.5% by end-2025, is positive on short-term government bonds, which benefit from rate cut expectations.
Konstantin Veit, a portfolio manager at bond fund PIMCO, said he did not see big moves in the euro against the dollar from here.
“They (ECB policymakers) are not in a mad rush.”
Investing.com – The US dollar rose in thin holiday-impacted trade Tuesday, retaining recent strength as traders prepared for fewer Federal Reserve rate cuts in 2025.
At 04:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 107.905, near the recently hit two-year high.
Dollar remains in demand
The dollar has been in demand since the Federal Reserve outlined a hawkish outlook for its interest rates after its last policy meeting of the year last week, projecting just two 25 bp rate cuts in 2025.
In fact, markets are now pricing in just about 35 basis points of easing for 2025, which has in turn sent US Treasury yields surging, boosting the dollar.
The two-year Treasury yield last stood at 4.34%, while the benchmark 10-year yield steadied near a seven-month high at 4.59%.
“We think this hawkish re-tuning of the Fed’s communication will lay the foundation for sustained dollar strengthening into the new year,” said analysts at ING,in a note.
Trading volumes are likely to thin out as the year-end approaches, with this trading week shortened by the festive period.
Euro near to two-year low
In Europe, fell 0.1% to 1.0396, near a two-year low, with the set to cut interest rates more rapidly than its US rival as the eurozone struggles to record any growth.
The ECB lowered its key rate earlier this month for the fourth time this year, and President Christine Lagarde said earlier this week that the eurozone was getting “very close” to reaching the central bank’s medium-term inflation goal.
“If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further,” Lagarde said in a speech in Vilnius.
Inflation in the eurozone was 2.3% last month and the ECB expects it to settle at its 2% target next year.
traded largely flat at 1.2531, with sterling showing signs of weakness after data showed that Britain’s economy failed to grow in the third quarter, and with Bank of England policymakers voting 6-3 to keep interest rates on hold last week, a more dovish split than expected.
Bank of Japan stance in focus
In Asia, fell 0.1% to 157.03, after rising as high as 158 yen in recent sessions, after the signaled that it will take its time to consider more interest rate hikes.
edged 0.1% higher to 7.3021, remaining close to a one-year high as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
Investing.com– Most Asian currencies moved in a tight range on Tuesday, while the dollar extended overnight gains as traders positioned for a slower pace of interest rate cuts in the coming year.
Trading volumes were muted before the Christmas break, while most regional currencies were nursing steep losses against the greenback for the year.
Asian currencies weakened sharply last week after the Federal Reserve effectively halved its outlook for rate cuts in 2025, citing concerns over sticky U.S. inflation.
Dollar near 2-year high on hawkish rate outlook
The and both rose about 0.1% in Asian trade, extending overnight gains and coming back in sight of a two-year high hit last week.
While the greenback did see some weakness after data read lower than expected for November, this was largely offset by traders dialing back expectations for interest rate cuts in 2025.
The Fed signaled only two rate cuts in the coming year, less than prior forecasts of four.
Higher U.S. rates diminish the appeal of risk-driven Asian markets, limiting the amount of capital flowing into the region and pressuring regional markets.
Asia FX pressured by sticky US rate outlook
Most Asian currencies weakened in recent sessions on the prospect of slower rate cuts in the U.S., while uncertainty over local monetary policy and slowing economic growth also weighed.
The Japanese yen’s pair fell 0.1% on Tuesday after rising as high as 158 yen in recent sessions, after the Bank of Japan signaled that it will take its time to consider more interest rate hikes.
The Australian dollar’s pair fell 0.2% after the minutes of the Reserve Bank’s December meeting showed policymakers saw an eventual easing in monetary policy, citing some progress in bringing down inflation. But they still flagged potential upside risks for inflation.
The Chinese yuan’s pair rose 0.1% and remained close to a one-year high, as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
The Singapore dollar’s pair rose 0.1%, while the Indian rupee’s pair rose 0.1% after hitting record highs above 85 rupees.
Investing.com — The dollar has surged past its post-2022 range, buoyed by U.S. economic exceptionalism, a widening interest rate gap, and elevated tariffs, setting the stage for further gains next year.
“Our base case is that the dollar will make some further headway next year as the US continues to outperform, the interest rate gap between the US and other G10 economies widens a little further, and the Trump administration brings in higher US tariffs,” Capital Economics said in a recent note.
The bullish outlook on the greenback comes in the wake of the dollar breaking above its post-2022 trading range, reflecting renewed confidence among investors driven by robust U.S. economic data and policy expectations.
A key risk to the upside call on the dollar is a potential economic rebound in the rest of the world, similar to what occurred in 2016, Capital Economics noted.
Following the 2016 U.S. election, economic activity in the rest of the world rebounded, while Trump’s tax cuts didn’t materialize until the end of 2017, and the Fed took a more dovish path than discounted, resulting in a 10% drop in the DXY on the year, which was its “worst calendar year performance in the past two decades,” it added.
While expectations for a recovery in Europe and Asia seem far off, a positive surprise for global growth “should be ruled out”, Capital Economics said.
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