Hard for euro to make gains against dollar

Despite a considerable amount of volatility on financial markets and diverging trends in US and eurozone monetary policies, the key euro-dollar rate has remained quite range-bound over the past year, largely trading in a $1.06 and $1.15 corridor.

This period of stability followed the big exchange rate moves in the second half of 2014 and opening couple of months of 2015 that saw the euro fall sharply, declining from $1.40 to a low of $1.05.

The euro has had the upper hand in the past couple of months, though, climbing from $1.08 to as high as $1.14, despite the further loosening of policy by the ECB, including moving interest rates even deeper into negative territory.

The Japanese yen has also strengthened, with the dollar sliding from ¥120 to ¥108 since the end of January, even though the Bank of Japan moved to a negative interest rate policy earlier this year.

The cuts in ECB and Bank of Japan rates, though, have been relatively small. The big change in recent months has been in relation to the market’s pricing on the future path of US rates.

Very subdued inflation, the downside risks to global growth and fragile sentiment on financial markets have made it difficult for central banks such as the Fed and Bank of England to tighten monetary policy despite the strength of their own economies.

As a result, markets have greatly scaled back their expectations for rate hikes. They had been expecting a series of hikes in the US.

Now, though, they do not expect the Fed to raise rates again until the second quarter of 2017, with just very moderate increases in interest rates thereafter.

The big scaling back of US rate hike expectations has taken the shine off the dollar, causing it to lose ground. It has declined by over 5% on a trade-weighted basis since the end of January. The increased risk aversion and volatility in financial markets this year has also helped currencies such as the euro and yen.

Currencies such as the Canadian, Aussie, and New Zealand dollars have also regained some ground against the US dollar recently, helped by a pick-up in commodity prices.

The euro-dollar rate is currently trading at around $1.13, near the top end of the $1.06 to $1.15 range that it has occupied over the past year.

Short-term interest rates look set to remain quite negative in the eurozone over the next couple of years, while the ECB also retains an easing bias.

Thus, it is hard to see the euro making significant gains against the dollar that takes it above the $1.15 to $1.16 level, unless there is a shock to the US economy that causes the Fed to start to consider easing policy.

Much uncertainty still surrounds the actual pace of Fed tightening.

The market is not pricing in another rate increase until early summer 2017, but recent projections by Fed officials point to a number of rate hikes before then.

The Fed may be cautious about raising rates but it clearly still has a tightening bias. Thus, unless the US economy slows significantly, the Fed could still hike rates later this year.

As we have seen in recent months, rate hike expectations remain a key driver of foreign exchange rates.

In the near-term, nervous financial markets and softer data seem likely to keep the Fed on hold.

However, the dollar could strengthen again if rate hikes come back on to the agenda in the US later in 2016.

We note that the dollar rose in October and November of last year, ahead of the Fed’s rate hike in December.

Although, given that any rate hikes in the US are likely to be modest enough, the dollar will probably find it difficult to make substantial gains.

Overall, we see potential for the dollar to rise towards $1.05 against the euro later this year from around $1.13 at present, if the Fed moves to tighten policy.

Meanwhile, if the UK was to vote to leave the EU in its referendum in June, it would also likely provide a boost for the dollar against the euro as well as sterling, given the uncertainty such a result would create for the EU.


Italy is a volatile place as you probably know, not just the passions of its people but is a place of active volcanos and frequent earthquakes. One of the most devastating earthquakes in recent years was the one that struck the Amatrice region in 2016.Wine with Leslie Williams: Some tasty Italian selections

It’s confirmed, being a dog owner is good for you. Esther McCarthy spoke to four celebrities about pride in their pooches.Animal magnetism: Celebrities and their treasured pets

We recently began watching a new sitcom called, ‘The Kids Are Alright’. It follows an American family in the early seventies as they raise eight sons.Lindsay Woods: I’m a dormant individual by nature but my children are adrenaline junkies

Rosscarbery antiques fair offers plenty of variety, writes Des O’Sullivan.See the value of rare notes and diamonds

More From The Irish Examiner