Further Euro Gains Likely as Central Banks Stay Loose
The euro and other higher-yielding currencies are positioned to continue to gain against the dollar this week, even as flagging U.S. jobs data cast doubt on the global economic recovery.
Investors need somewhere to put the cheap money sloshing around their portfolios, courtesy of the ultraloose policies recommitted to last week by the U.S. Federal Reserve and other central banks.
As long as investors remain assured central bankers will keep the cheap money flowing, money will continue to funnel into risk-positive trades, including high-yielding currencies and stocks, analysts said.
"None of the Group of Three central banks is rushing to withdraw liquidity," Steven Englander, chief U.S. currency strategist at Barclays Capital in New York, said of the U.S., euro-zone and Japanese central banks. "Through the rest of the year, markets are going to take comfort in that," sending risk-positive assets higher.
In a report to finance ministers and central-bank governors from the Group of 20 leading economies, the International Monetary Fund said there are indications the U.S. dollar is being used as a funding currency for "carry trades," a strategy in which investors borrow in currencies that are expected to have low interest rates over the medium term to buy currencies that are expected to have higher interest rates.
"These trades may be contributing to upward pressure on the euro and some emerging economy currencies," the IMF said. "The euro has experienced most appreciation among major advanced economy currencies and remains on the strong side of its equilibrium."
But G-20 officials gave no indication that they would take action that would force investors to rethink their carry trades. Their final statement made no mention of currencies, and discussion on foreign-exchange issues on the sidelines of their meeting in St. Andrews, Scotland, appears to have been limited.
The IMF added to pressure on the Chinese government to allow the yuan to appreciate by describing the currency as "significantly undervalued."
But U.S. Treasury Secretary Timothy Geithner said tensions with China over exchange-rate policy aren't escalating, while Chinese officials repeated their call for a stable U.S. dollar.
Friday in New York, the euro was at $1.4847, down from $1.4877 late Thursday. The dollar was at 89.96 yen, down from 90.77, while the euro was at 133.56 yen from 135.04. The U.K. pound was at $1.6610, up from $1.6587. The dollar was at 1.0173 Swiss francs from 1.0162 francs.
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