The euro gained further ground on the dollar, climbing to its highest level in nearly two years to cap a week that saw investors toss aside uncertainties about eurozone monetary policy and establish the currency at the heart of foreign exchange activity.
At $1.1677, the euro touched a level not reached since August 2015, pushing gains for the week to 1.8 per cent. The euro was broadly higher against its peers, gaining 2.5 per cent against the pound.
“The euro is rising and rising,” said Commerzbank, eyeing $1.20 after Thursday’s European Central Bank meeting and marking investors’ cards for the appearance at the annual Jackson Hole symposium in Wyoming of its president, Mario Draghi, at the end of August.
Until then, said analyst Esther Reichelt, “euro optimism” is set fair — only the unlikely prospect of deteriorating data capable of stopping its progress.
Mr Draghi’s press conference on Thursday was the key market event of the week, prompting investors to drive the euro higher after concluding the ECB president had been less dovish than expected.
“Draghi missed the opportunity to talk the euro down,” said Hans Redeker at Morgan Stanley, suggesting that any correction lower for the euro now required the help of dollar strength.
In the absence of a clear dovish position from Mr Draghi, investors resumed their euro-buying activity which has pushed the currency nearly 10 per cent higher this year, having heard nothing to deflect them from believing the ECB will in September announce tapering starting next year.
“The ECB retained the warning that it could boost its asset purchases if necessary but no one really believes it will,” said Marc Chandler at Brown Brothers Harriman.
Investors are now targeting the August 2015 euro-dollar high of $1.1715, said Mr Chandler, adding: “There continues to be talk of keen interest in $1.20 strikes and the indicative pricing in the options market is consistent with euro call buying.”
The snag for the ECB is the impact of a rising euro on inflation. The euro was significantly undervalued by asset purchases and negative rates, said Kit Juckes at Société Générale, but the central bank is faced with a dilemma.
“The currency can’t stay this undervalued if they are going to taper (even if they aren’t going to act imminently) but the appreciation towards fair value will be a drag on inflation. How Mr Draghi tackles his euro-dilemma may be the biggest driver of FX trends in 3Q,” said Mr Juckes.
The ECB may be uncomfortable about the euro’s strength but its ability to influence it was limited, according to Goldman Sachs — one move it could make would be to strengthen forward guidance on policy rates.