The euro remains the strongest performing G10 currency this year, with a gain of 12% against the U.S. dollar thus far in 2017, points out the research team at Wells Fargo.
“This comes even as European short-term yields have fallen relative to their U.S. counterparts this year, which arguably might have led to euro weakness, not euro strength. However, a closer examination of currency/interest rate relationships suggests the euro may have become more closely tied to changes in long-term interest rate differentials, which have generally moved in favor of the euro since the start of the year. This apparent shift in drivers of the euro coincides with increasing focus on the European Central Bank’s (ECB) asset purchases, which tend to have a more noticeable influence on long-term interest rates. Should long-term rates remain an influential driver of the euro, we think the effect of Fed rate hikes on the single European currency could be diminished, while the euro should continue to gain as we approach the eventual end to the ECB’s asset purchases.”
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