Euro rises to June highs as falling US Treasury yields weigh on US Dollar
- EUR/USD climbs to its highest level since June as the US Dollar comes under broad selling pressure.
- Long-term US Treasury yields fall sharply after the Treasury announces larger buybacks of longer-dated debt.
- Fed rate-hike expectations ease, while markets still expect the ECB to raise rates in September.
EUR/USD climbs sharply on Wednesday, reaching its highest level since June as the US Dollar (USD) comes under fresh selling pressure following the US Treasury’s announcement that it will increase buybacks of longer-dated government debt. At the time of writing, the pair trades around 1.1653, up 0.68% on the day.
In a press release, the US Department of the Treasury said it will at least double the size of its liquidity-support buyback operations for longer-dated nominal coupon securities, covering the 10-year to 20-year and 20-year to 30-year sectors. The maximum size of each operation will increase from $2 billion to at least $4 billion.
Following the announcement, long-term US Treasury yields fall sharply as bond prices rise. The 30-year Treasury yield drops by around 9 basis points to near 5.20%, after rising above 5.30% on Tuesday, its highest level since 2007.
The Greenback was already trading on the back foot earlier on Wednesday as softer US economic data in recent weeks prompted traders to scale back expectations of a Federal Reserve (Fed) interest-rate hike at the upcoming meeting.
The US Dollar Index (DXY), which gauges the Greenback's value against a basket of six major currencies, trades near 99, down 0.65% on the day and touching its lowest level since June 1.
Attention now turns to the minutes of the Federal Open Market Committee’s (FOMC) July meeting for fresh clues on the monetary policy outlook.
In contrast, markets widely expect the European Central Bank (ECB) to raise interest rates in September amid persistent concerns over energy-driven inflation.
Meanwhile, the final reading of the Eurozone Harmonized Index of Consumer Prices (HICP) showed inflation rose 0.2%MoM in July, unchanged from the preliminary estimate. Core HICP inflation was also confirmed at 2.5% YoY.
Euro FAQs
The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
