MARKET STORM LEAVES EURO HIGH AND DRY / THE WALL STREET JOURNAL
Markets Storm Leaves Euro High and Dry
The euro’s strength will cause new problems for the eurozone economy and European Central Bank.
By Richard Barley
Photo: Agence France-Presse/Getty Images
As global markets spiral lower, investors are seeking safety. The euro, a currency whose political integrity was in question only six weeks ago, is a clear winner. That presents a headache for the eurozone.
The euro on Monday briefly hit $1.17, its highest against the U.S. dollar since January. Less than a week ago the single currency was close to $1.10. On a trade-weighted basis, the euro is now at its strongest since the European Central Bank announced its bond-purchase scheme in January, data from the central bank show.
In part, the rise in the euro is the result of investors scaling back expectations of an increase in U.S. interest rates. The gap between U.S. and German two-year bond yields has contracted sharply in recent days, undermining the dollar’s appeal. German two-year yields, at -0.28%, are already extraordinarily low.
So, the more the U.S. bond market worries about growth and the ability of the Federal Reserve to increase rates, the more the gap is likely to be squeezed. That will add further support to the euro.
Even more powerful at present are technical forces. The euro’s low-yielding status, with big chunks of the eurozone government bond market offering negative yields, has turned it into a so-called funding currency. In this, it is like the Japanese yen, a currency in which it is attractive to borrow to fund risky bets elsewhere.
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