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Dollar Strong against Euro on US Statistics but ECB Will Set the Pace

Posted by Joseph Trevisani on Nov 5, 2013 3:14:00 PM

The dollar gained a seven week high against the euro yesterday and almost matched that today bolstered by U.S. economic reports, higher Treasury rates and market speculation that the ECB will act on Thursday to support the European economy.

The euro touched 1.3442 today and 1.3449 on Monday, the lows since September 18th when the Fed surprised the market by maintaining the pace of quantitative easing and the euro gained over 200 points against the dollar.  

The Institute for Supply Management manufacturing and services indexes for October, which poll industry managers, were both stronger than expected.The manufacturing index, released Friday registered 51.8 in October against the 51.1 prediction. Today's service sector report  scored 55.4, besting the 54.0 forecast.

Treasury rates have also been rising along with the improving American statistical picture.

Higher interest rates tend to support a currency by providing better returns for investors in the currency.  The yield on the benchmark 10-year Treasury rose 6 basis points today to 2.67 percent , the highest since October 16th and 20 points more than the recent low on October 30th at 2.47 percent.

European inflation dropped to 0.7 percent year over year in October, and 0.8 percent for the core rate. Except for the financial crash and its aftermath in 2008 and 2009, these are the lowest rates in the history of the euro. Unemployment in the currency zone rose to 12.2 percent in September from 12.0 percent in August the highest rate in over 20 years.

The ECB has come under pressure from Southern tier counties in the EMU for assistance with the crippling austerity that has hobbled their economies since the financial crash. But the central bank cannot change the fiscal policies and bailout terms that have drained the Italian, Spanish Greek and Portuguese economies.

Under the influence of the German government of Angela Merkel the ‘real’ refinance rate set by the ECB of -0. 3 percent (refinance rate 0.5 percent - core inflation 0.8 percent y/y) is considerably higher than the 'real' Fed Funds rate of -1.45 percent (Fed Funds rate 0.25 percent - core CPI y/y -1.7 percent). ECB President Mario Draghi cannot lower the refinance rate but the bank could increase its securities purchases and utilize the Federal Reserve quantitative easing program.

Euro traders are banking on some sort of accommodation out of the ECB but in the past the ECB has been more scrooge than Santa Claus.

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

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