Euro’s rally triggers fears of side effects
LONDON (UK) – Euro bulls will be hailing the currency’s quick rally to two-year highs against the greenback after years of gloom. However, the euphoria is being tempered by wariness about its side effects.
Since May, the euro has witnessed a 11% jump against the dollar after benefiting from the currency’s weakness and the EU’s joint decision to roll out a stimulus plan to help economies battered by the pandemic. It will end July with its best monthly performance in ten years.
Euro’s real exchange rate has gone up to six-year highs.
Some believe they may hold off adding to those positions for fear of alerting the European Central Bank to into pressing down the euro, viewing it as rising too far, too quick. Apart from affecting exports, the bank would not like to see the currency complicating its fight against deflation.
Portfolio manager at BlueBay Asset Management Kaspar Hense said he is now avoiding long euro positions, viewing levels around $1.18 as possibly triggering “more noise from the ECB to cut rates again. That’s why it is just not our favoured cross.”
The euro traded at $1.19 on Friday. On May 18, just before the EU stimulus plan was proposed, it stood at $1.08.
According to UBS Global Wealth Management’s economist Dean Turner, the euro is likely to remain in the $1.15-$1.20 range for now.
“The rule-of-thumb simple model would suggest a 10% rise in the euro would knock 40 basis points off annual GDP growth, so this can’t go on indefinitely,” Turner added.
The euro zone economy is expected to shrink 8% this year. Annual inflation is around 0.3%.
(Photos syndicated via Reuters)
This story has been edited by BH staff and is published from a syndicated field