Euro ends long tumble, EU economy seems to revive

Frankfurt (May 2)  The 19-nation currency posted its biggest weekly gain versus the dollar in six weeks on signs the European Central Bank’s stimulus plan has the region’s economy ready to generate stronger growth and inflation. US first-quarter economic growth was slower than forecast, meanwhile, fanning speculation the Federal Reserve won’t rush to raise interest rates.

“The euro has looked heavily oversold for a while,” Shaun Osborne, head of global foreign-exchange strategy at Toronto- Dominion Bank, said by e-mail. “It has brought a much needed correction to the market.”

The euro gained three per cent to US$1.1199 this week in New York, staging a six-day climb that was the longest rally in more than a year. The 4.6 per cent April rise was the first since June and largest since September 2010.

The shared currency strengthened four per cent to 134.58 yen this week, the biggest gain in two years. Japan’s currency fell one per cent to 120.15 per dollar.

Hedge funds and money managers reduced net bearish bets for the euro to weaken against the dollar again after reaching a record on March 31, according to Commodity Futures Trading Commission data. Futures positions betting on a weaker euro were at 197,766 contracts as of April 28, compared with 214,645 a week earlier.

Inflation watch

Euro-area consumer prices ended a four-month streak of declines in April after falling 0.1 per cent in March. The ECB seeks to foster inflation close to two per cent.

The signs of rising prices reflected results for the central bank’s bond-buying program, sending the euro higher and helping fuel a rout in euro-area bond markets. Government bond yields moved higher in Germany and other nations, adding to the allure of euro-denominated assets.

“With German yields shooting higher and European equities getting squeezed, you saw those short euro-dollar positions that went with them get unwound too,” said Matt Derr, a foreign- exchange strategist at Credit Suisse Group AG in New York.

The common currency’s bounce above US$1.10 has it sizing up a key hurdle: The 100-day moving average at about US$1.13.

Run room

“It might run a little higher still in the near-term,” TD Bank’s Osborne said. If it climbs above US$1.13, the next target is the US$1.15 to US$1.16 range, he added.

Lacklustre US data magnified the euro’s rally by casting doubt on the timing of the Fed’s first interest-rate increase in almost a decade.

The biggest hit to the dollar came on April 29, when a report showed the US economy sputtered to a near-halt in the first quarter, and the Federal Open Market Committee didn’t give a strong signal for higher rates. The greenback slid 1.3 per cent against the euro that day.

“We’ve had a really significant move in terms of a retracement of the strong US dollar position,” said Camilla Sutton, Toronto-based head of currency strategy at Bank of Nova Scotia. “As we all moved from one side of the boat to the other, it really created some pretty violent market moves across asset classes.”

Even after its losses in April, the dollar is still the best-performing major developed currency during the past 12 months, gaining 18 per cent, according to Bloomberg Correlation- Weighted Indexes. The euro dropped 7.3 per cent, the indexes show.

Source: Bloomberg