The euro has hit a three-year high against the dollar amid rising optimism about growth in the bloc.
With data showing economic resurgence in the eurozone, such as the manufacturing purchasing managers’ index which is at a 20 year high, investors are growing more upbeat about the bloc’s prospects.
The currency’s rise also coincided with a fresh drop down on the dollar, with the eurozone’s improving economic outlook spurring more investors to rebalance their portfolios towards the region. The dollar has weakened as markets grow increasingly confident that a global recovery would outpace US growth, and prompt other major central banks led by the ECB to unwind its quantitative easing policy quicker than market expectations.
“Despite the stronger US inflation number on Friday, the dollar couldn’t gain traction,” said John Moclair, head of Global Customer Group at Bank of Ireland Global Markets.
“Recent minutes from the ECB board meeting indicated a further shift towards ending monetary policy accommodation, while the favourable outlook for Europe that has been building in recent months has seen corporate confidence and investment rebound, and growth remain strong.”
But the boost in the euro comes as Moody’s Investor Service warned that the eurozone’s growth potential remains “lacklustre” as issues like long-term unemployment remaining unaddressed.
In a note to investors, Moody’s said that while the acute phase of the eurozone debt crisis is over, countries – and the monetary union as a whole – are still dealing with its fiscal, economic and institutional legacies.
“At the country level, credit fundamentals are still much weaker than they were pre-crisis,” the note said. “Governments are much more indebted, the unemployment legacy of the crisis lingers, and the institutional fragilities exposed by the crisis have not yet been fully addressed.
“At the euro area level, significant vulnerabilities to event risk remain because the targeted Banking Union is incomplete and fiscal union is off the table.”
Moody’s said it expected the cyclical economic recovery that began in late 2013 to continue in 2018. This, it said, should support an improvement in “credit fundamentals” in some countries. It also noted that banking systems impacted by the crisis in Ireland, Austria, Slovenia, Spain and Portugal have since strengthened their capital buffers and asset quality. But it warned that the region’s growth potential remains relatively lacklustre at roughly 1.5pc.
“Structural constraints to growth, such as high long-term unemployment, remain unaddressed. The current cyclical upturn is flattered by unusually accommodative monetary policy and other transient factors, including favourable commodity price developments.”
But for the most part, there is optimism about the eurozone upswing. JP Morgan, for one, expect the eurozone’s economy to outpace that of the US in 2018, and that optimism is weighing on the dollar. Measured against a basket of currencies, the dollar was down 0.5pc yesterday, its lowest since early 2015.
“There will be a correction [for the euro] at some point,” said Kit Juckes, London-based global strategist at Société Générale. “But as long as the [economic] 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.”
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