Euro Runs Its Best Winning Streak in Two Decades Versus Dollar

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Euro Runs Its Best Winning Streak in Two Decades Versus Dollar.

foreign exchange :: 1day ago :: source - bloomberg

By Vassilis Karamanis and Anya Andrianova

(Bloomberg) -- The euro notched its longest winning streak against the dollar in more than two decades — and options traders are betting the rally isn’t over yet.

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The greenback’s recovery earlier in the day pressured the common currency, leading it to curb its advance after it touched the highest level since September 2021 earlier in the session. It’s the longest stretch for the euro since 2004, eclipsed only twice since the currency’s inception in 1999.

The Bloomberg Dollar Spot Index advanced to a session high after Donald Trump’s $3.3 trillion tax and spending cut bill passed the Senate. It was also gaining after the first of this week’s reports on US labor market conditions failed to provide justification for a Federal Reserve interest-rate cut as soon as next month. The index later traded slightly weaker.

“I think the knee-jerk reaction was to buy the dollar on lower fiscal policy uncertainty,” said Win Thin, global head of markets strategy at Brown Brothers Harriman & Co. “To me, pushing through a massive tax cut will eventually widen the budget deficit, which is ultimately dollar-negative.”

The common currency traded 0.2% up at $1.1806 on Tuesday. Its recent rapid advances pushed options traders to ramp up bullish positioning. So-called risk reversals — a closely watched measure of market sentiment — posted the third-strongest bullish repricing of the year last week. Data from the Depository Trust & Clearing Corporation show that nearly two out of three options in the past week targeted a stronger euro.

The euro’s rally has been underpinned by a long-running slide for the dollar, with fresh momentum from weaker US data and growing conviction that the Fed is preparing to ease policy more aggressively than the European Central Bank. According to Danske Bank AS strategists led by Jens Naervig Pedersen, the dollar’s structural decline has resumed as geopolitical risks fade and focus returns to the US economy and political backdrop.

“We see many reasons to be short USD right now, including the possibility of a new Fed Chair being appointed earlier than expected,” he said.

All currencies in the Group of 10 climbed against the greenback this year. The euro has risen nearly 14% against the greenback in the period, one of the top performers together with the Swiss franc, while a dollar index has fallen more than 9%.

“Trump’s trade tariff risks to inflation have hindered the Fed’s ability to cut rates and this means the Fed likely has more easing to do than most of the rest of G-10 central banks,” analysts at MUFG, including Derek Halpenny, wrote in a note. “Given the euro gains and seeing limited risk for any notable correction lower, we see the $1.20-level now as very achievable later this year.”

Analysts increasingly see the euro rallying toward $1.20 in the coming months. Strategists at Societe Generale SA, including Kit Juckes, expect the common currency to peak at around $1.25 over the medium term, even if it lags the yen and some Asian peers in the second half of the year.

European Central Bank Vice President Luis de Guindos said Tuesday that while a move to $1.20 is “acceptable,” further gains would make policymakers’ task more complicated.

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“While a mild strengthening of the currency doesn’t pose a particular concern for the ECB, gains that are too rapid tend to tighten financial conditions and may threaten to crimp economic growth.”

— Ven Ram, Macro Strategist, Dubai. Click here for the full piece.

For Nicholas Wall, head of Global FX Strategy at J.P. Morgan Asset Management, the ECB is doing the right thing by embracing a euro that’s attracting more demand as a reserve currency. “A stronger euro is good for Europe partly in the context of rising oil prices,” he said.

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The latest euro-area inflation data offered little reason for the ECB to alter its stance. Consumer prices rose in France and Spain but held steady in Italy and unexpectedly eased in Germany, reinforcing the central bank’s view that inflation will converge sustainably toward its 2% target.

--With assistance from Naomi Tajitsu.

(Updates market pricing throughout, adds commentary in ninth paragraph. An earlier version corrected the euro level in second paragraph.)