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merkel propels euro to six month high

Posted by Joseph Trevisani on May 22, 2017 5:30:37 PM

The euro rose to its best level against the dollar in six months after German Chancellor Angela Merkel said on Monday that  the united currency was "too weak', a comment German officials have made in the past but not to such effect.

Europe's united currency  touched 1.1263 in New Y0rk trading its highest  since 1.1299 on November 9th, the top of that day's four figure range in the the aftermath of the U.S. Presidential election. The euro finished then at 1.0909, just points from the low of 1.0902. Over the next two months it dropped almost 600 points  to 1.0339 on January 3rd.

 Prior to the election volatility the one year high against the dollar had been 1.1614 on May 5th 2016. 

Ms Merkel said that the euro was weak  because of the European Central Bank's  (ECB) accomodative  monetary policy.

The ECB has forced down interest rates on the continent by buying  60 billion euros of sovereign and commercial debt in the credit markets each month.   Although the  official  main refinance rate is zero, many national rates are below zero, an unusual and unprecedented state of affairs that has  done little to promote the central bank's goal of economic growth. 

Over the past three years the euro has fallen sharply from 1.3992 in May 2014 as the ECB adopted the zero rate and quantative easing policies of the U.S. Federal Reserve.  

In recent weeks the euro has climbed against the dollar as the strong market reaction to the election of Donald Trump has dissipated. That rebound, particularly in the last month, probably has more to do with the changing political fortunes of the U.S. President and his economic agenda than any positive developments for the euro. 

The Federal Reserve abandoned its quantative easing policy more than two years ago and has raised its benchmark Fed Funds rates three times to 1.5 percent.

However, until the ECB returns to more traditional monetary tools the euro is unlikely to see any sustained improvement against the dollar. 

Joseph revisani

Chief Market Strategist


Chart: Thomson/Reuters

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