After gaining 16 percent against the dollar in 2017 then retreating at year end, the euro broke above its September high on Friday to its best level versus the dollar in three years.
The euro has been aided for the past six months by changing perceptions of political risk on the continent, where a separatist threat in Catalonia has subsided and various elections have kept Euro-skeptic politicians from power. Yesterday German Chancellor Angel Merkel reached a preliminary agreement for a coalition government, sixteen weeks after an inconclusive election, removing another source of instability.
Further supporting the united currency is the increasing likely hood that the European Central Bank will soon curtail or abandon its accommodative monetary policy as the EMU economy joins the United States in accelerating expansion.
The proximate cause for the euro's two day 2 percent run higher against the greenback was the release on Thursday of the minutes from the ECB's December meeting portraying a potentially hawkish shift in bank strategy in the first quarter.
Markets are now expecting that the ECB's 30 billion a month in bond purchases, reduced to that amount in December and extended until September, will be further restricted or even eliminated in the months ahead. Money markets have priced in a 70 percent possibility of a 10 basis point increase in the deposit rate by year end, up from 50 percent on Monday. It would be the first increase in six years.
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