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Euro falls and this time it's not Greece

Posted by Joseph Trevisani on Jun 23, 2015 2:16:00 PM

Euphoria is no competition for the cold facts of central bank rate policy.

While Greece may have a deal with its creditors to avoid default, the euro fell the most in three months against the dollar on fears that the Federal Reserve will carry out its threat and raise interest rates in September for the first time in eight years as the ECB maintains easy money for the foreseeable future.

The 19-member united currency weakened versus all of its major peers while Europe's stocks and the bonds of Greece, Portugal, Italy and Spain rose on speculation that Athens will soon complete a deal with the IMF, ECB and European Union. The potential agreement would give Greece access its remaining bailout funds, keep the liquidity flowing to its stricken banks and ultimately make its June 30th payment to the IMF.

The euro fell 1.5 percent to 1.1169 at 3:40 p.m. New York time and declined 1.1 percent to 138.36 yen. The dollar was trading at to 123.96 yen, up 0.5 percent.

One catalyst for the euro decline was comments from Federal Reserve Governor Jerome Powell, who said in an interview with the Wall Street Journal that there could be two interest-rate hikes this year and that the U.S. stock market was not showing signs of being in a bubble.

If the economy unfolds as expected, conditions for two rate hikes this year could be in place as soon as September. The U.S. central bank has set two conditions for a rate hike — continued improvement in the labor market and confidence that inflation is moving toward the central bank’s 2% annual target, reported the WSJ.

“I would see that test potentially being satisfied as soon as September,” Powell said in a conversation at a breakfast sponsored by The Wall Street Journal. He described the possibility of a September hike as a "coin flip." 

“I don’t think the odds are 100% on that. I think the odds are probably 50-50 range that we will realize those conditions,” Powell added at the WSJ event.

The Fed has been public for more than a year with its desire to end its zero rate policy.

Chair Janet Yellen raised the possibility in her first press conference in March 2014 when she suggested that this month, a half year after the end of quantitative easing, was a potential date for a rate increase.

As it turned out the economy was much weaker in the first quarter than the Fed had forecast, contracting 0.7 percent at an annual rate, and that has pushed the expectation for a rate hike back to September at the earliest.  

Financial markets are generally more dovish than the Fed, and today's durable goods orders for May, -1.8 percent on a 0.6 percent forecast with April's negative revision to -1.5 percent, will do little to convince markets that the Fed is ready to risk a rate increase in September.

The Dow closed 24 points higher at 18,144, and the Fed has repeatedly said that it is 'data dependent' in its determination for a rate hike. 

In Europe the ECB began a 1.1 trillion euro ($1.23 trillion) bond-buying plan earlier this year in an effort to head off deflation and spur economic growth.  

The euro has slipped 4.4 percent this year, the worst performer after the New Zealand dollar among 10 developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes.

 

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Chart: WWM Alpha Trader

june 23

 

 

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