LONDON: The euro rose to a three-year high against the dollar on Monday, fuelled by growing economic optimism in the eurozone and expectations that the European Central Bank will tighten monetary policy.
The currency’s rise against a broadly weakened dollar has been particularly marked, with the eurozone’s improving economic outlook spurring more investors to rebalance their portfolios towards the region.
Speculators boosted net long positions in the euro to a record high in the week to Jan. 12, according to the latest futures data. Against a basket of currencies, the euro is at its highest since late 2014.
The dollar has weakened as markets grow increasingly confident that a global recovery would outpace U.S. growth and prompt other major central banks led by the ECB to unwind its easy policy quicker than market expectations.
Measured against a basket of currencies, the dollar was down 0.5 per cent on Monday, its lowest since early 2015.
“There will be a correction [for the euro] at some point,” said Kit Juckes, London-based global strategist at Societe Generale. “But as long as the data remains strong, the market is going to believe in the idea that there is more coming. That tapering is going to be brought forward.”
Juckes said that the market was repricing the euro to account for the perceived change in the ECB’s monetary stance and, with fair value of the euro estimated at between $1.25 and $1.30, the single currency had further room to rise.
The euro was up 0.5pc at $1.2258 after hitting a high of almost $1.23, adding to gains made last week after the ECB said it could revisit its communication stance in early 2018. That heightened expectations policymakers were preparing to reduce the stimulus programme.
Hopes that a pro-European governing coalition is set to form in Germany have also boosted confidence in the continent.
Published in Dawn, January 16th, 2018