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Euro Soars on Draghi Reticence, Dollar Woes

Posted by Joseph Trevisani on Aug 28, 2017 4:55:05 PM

The euro reached a two-and-a-half year high against the dollar on Monday after European Central Bank President Mario Draghi offered no hints on future bank policy in speeches last week and the Texas coast and Houston suffered serious damage from Hurricane Harvey.

Traders pushed the euro as far as 1.1985  in early afternoon action in New York, after touching 1.1980 in Europe. Both of today's tops were the strongest the united currency has been against the greenback since January 2015.

In two speeches last week, the second at the Federal Reserve Jackson Hole conference, Mr. Draghi made no mention of future steps in monetary policy. With the Fed already two years and four hikes into its rate normalization, speculation has been rife that the next move from the ECB will be to curtail or halt its monetary support of the Eurozone economy.  Since its April 7th low of 1.0591 the European currency has gained 13 percent against the U.S. Dollar.

Stateside, Hurricane Harvey, which came ashore on the Texas Gulf Coast as a category 4 storm, continued to pound Houston and the surrounding area with torrential rain, causing widespread flooding and shutting a number of oil refineries.

There is potential for several more days of damaging rain and even for the storm to re-enter the Gulf of Mexico, strengthen and hit land again further west toward New Orleans. Damage assessment has barely begun but the economic cost will be very high and perhaps an all-time record for the United States. Houston is one of the centers of the American petroleum industry. 

In his Jackson Hole speech on Friday, President Draghi noted, without mentioning specific countries, that protectionist policies could pose a "serious threat" to the global recovery, though he added that world economic growth appeared to be improving.

 Federal Reserve Chair Janet Yellen was likewise reticent on monetary policy. Her remarks centered on the restructuring and strengthening of the regulatory system following the financial crisis. 

The British exit from the European Union has also receded as a driver of euro decline. Negotiations resume on Monday between the U.K. and the EU when officials meet in Brussels for the Articles 50 talks.

Although the sides appear far apart on many points, particularly on immigration, market access and the terms of any financial settlement,  the combative rhetoric has diminished now that the real work of discussion and agreement is underway.  

Market sentiment still leans heavily on the eventual amicable if not happy end to U.K.'s European Union membership. 

Joseph Trevisani

Chief Market Strategist


Charts: St Louis Federal Reserve, Bloomberg

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