EUR's 8.4% Gain Against USD Poses Threat To European Economy

The euro’s 8.4 percent gain against the U.S. dollar in the past six months is posing a fresh threat to the European economy just as it shows signs of escaping the debt crisis, Echoing policy makers from Switzerland to Japan in bemoaning strong exchange rates, Juncker late yesterday called the euro’s value “dangerously high” after the 17-nation currency this week traded above $1.34 against the dollar for the first time since February last year.

The euro has rallied amid growing signs in financial markets that the three-year debt turmoil is fading and after European Central Bank President Mario Draghi last week signaled no immediate plan to ease monetary policy further. The European currency dropped as much as 0.9 percent after Juncker’s comments, the biggest intraday decline since January 3. The euro traded at $1.3306, down 0.6 percent. It touched an intraday high of $1.3404 on January 14, the strongest since February 29, 2012.

GBP/USD
Bank of England Governor Mervyn King said on November 14 that while he never called for changes in exchange rates, sterling’s increase over the previous year was “not a welcome development. U.K. stocks were little changed amid concern that U.S. lawmakers will fail to increase the federal government’s debt ceiling. The FTSE 100 lost 3.87 points, or 0.1 percent, paring a slide of as much as 0.4 percent.

The equity benchmark rose to its highest level since May 2008 last week amid optimism that U.S. companies’ earnings would exceed analysts’ estimates. There seems to be some intolerance from both parties in the U.S., and investors are mainly waiting for a sign of a resolution regarding spending cuts, which is essentially the biggest part of a budget deal, This has been bothering markets a little lately, and is back today after Obama’s comments last night.

USD/JPY
The yen gained for a second day amid speculation the Bank of Japan will fail to impress investors with extra policy measures at its January 21-22 meeting. The currency touched the lowest in more than two years this week on bets that the BOJ will raise its 1 percent inflation target and introduce more monetary stimulus. Expectations for more monetary easing by the BOJ have been running ahead of themselves, so people are cautious about a possible disappointment.

A further decline in the yen is less likely unless there is a surprise. The yen rose 0.6 percent to 88.26 per dollar, BOJ Governor Masaaki Shirakawa and his fellow board members will review the central bank’s inflation goal at their meeting. Prime Minister Shinzo Abe has called for the target to be doubled and said on January 13 that he wants a BOJ chief who can push through bold monetary policy.

USD/CAD
The Canadian dollar weakened the most in six months against the yen on speculation the central bank may limit policies to devalue the currency after Japan’s economy minister said the country faces economic risks. The currency fell earlier today against its U.S. counterpart as Canadian existing home sales fell and manufacturing in the New York region unexpectedly contracted in January, indicating economic headwinds for the nation’s largest trading partner.

Japan’s Akira Amari warned currency weakness could negatively impact consumers, signaling the government may avoid pushing the central bank to enact more monetary stimulus. The Canadian dollar was little changed at 98.43 cents per U.S. dollar.