Euro dominates global currency market

The euro is trading at its highest level against the US dollar this year, emerging as the clear winner from recent volatility in global currency markets.

By breaking through the iconic $1.10-per-euro threshold, the common European currency gained more than 2.5% in August 2024, marking its best month since November last year.

Traders, distracted by the yen's sudden surge following the Bank of Japan's surprise rate hike and the dollar's weakness amid rising expectations of a rate cut by the US Federal Reserve, are now focusing on the euro.

The euro is currently the second strongest currency against the US dollar this year, after the British pound.

The currency also has an all-time high trade weighting, partly due to the weakness of emerging market currencies.

Although only a slight increase is expected, developments for the euro are still being closely watched.

“This is a story of interest rate differentials,” said Volkmar Baur, currency analyst at Commerzbank. “Inflation is falling on both sides of the Atlantic, but the Fed is expected to be more aggressive in cutting rates (than the European Central Bank). This helps to narrow the interest rate gap and create conditions for the euro to strengthen.”

The ECB, which cut interest rates last June, could make at least two more cuts of 25 basis points each.

Conversely, traders see the Fed cutting rates by as much as 94 basis points in its remaining three meetings this year.

The euro was not the only currency to strengthen against the dollar in August 2024, but it is seen as a safe haven in volatile foreign exchange markets.

“Some of the risks to the euro have receded, like the French election. Now the story is largely about central bank decisions,” said Salman Ahmed, head of global macro asset allocation and strategy at Fidelity International.

However, analysts say the euro is at the top of its recent trading range and therefore there is not much room for growth left for the currency.

Commerzbank forecasts the euro will trade at $1.11 per euro by the end of the year, unchanged from the current level.

Meanwhile, ING forecasts the exchange rate will reach $1.12/euro before falling to $1.10/euro, while Bank of America predicts a trading price of $1.12/euro by the end of this year.

One variable that could affect the euro is the US presidential election on November 5.

Analysts say that in the scenario where Donald Trump wins the election with protectionist policies and domestic tax cuts, inflation will increase, leading to the possibility of the Fed tightening policy and a stronger USD.

Meanwhile, Rabobank's head of currency strategy Jane Foley noted that the euro's recent rise comes as Trump's rival, US Vice President Kamala Harris, strengthens her position in the polls.

“The thing that could really push the exchange rate above $1.10 and sustain it is a Harris win, coupled with a slowdown in the US economy,” said Ms Foley.