How ‘brutal’ will the euro’s rise get?

LONDON: The speed of the euro’s 10% surge against the US dollar over the past 100 trading days resembles the sort of “brutal” currency moves the European Central Bank has moaned about in the past.

But so far at least, there has been barely a reference to the move from policymakers or euro area exporters.

Currency markets have mostly focused on the flip side of the pair — the retreat of the US dollar — as pandemic-related funding stress dissipates, the likely prospect of even further easing from the Federal Reserve and a looming US election.

And euro positivity has been rooted in “good news” developments: Europe’s post-virus fiscal support plans and a related reduction of euro breakup risks, as well as the region’s relatively more successful virus control to date.

But isolating the European side of the equation, the rise of the trade-weighted euro does look like a problem for a central bank trying to ward off deflation risks and for exporting companies already under severe stress from such a deep world recession.

The euro hit a six-year high last week — up more than 7% in just 160 trading days. The last time it rose that far that fast was in 2017, when then ECB chief Mario Draghi warned that its steep climb was a “source of uncertainty” for price stability.

Mr Draghi’s predecessor Jean-Claude Trichet was fond of using the word “brutal” to describe steep euro snarl-ups by way of signalling the central bank’s displeasure — the first in early 2004 after gains of 20% in 18 months and again in 2007.

But there’s been little or no obvious reference to the euro move from ECB officials so far.

Investors too seem relaxed. The latest strategy updates from two of the world’s top asset managers, Blackrock and Amundi, barely mentioned the euro rise — even though the former reiterated its preference for European over US equities and the latter downgraded its view on euro/dollar to “neutral”.

Barclays, meanwhile, reckons that European equities and the euro can continue to rise further, as they are both benefiting from transatlantic investment flows and justified by fundamentals.

JPMorgan analysts reckon that much of the recent euro rise was driven by speculative flows and corporate hedging and these look to have to run their course for now. But with few reasons to embrace the dollar ahead of November’s elections, an accelerating euro rise may yet turn “brutal”.