The common currency has now gained approximately 9% against the dollar, sterling and yen over the past four months following positive election results in the Netherlands and France, robust economic growth and falling unemployment across the eurozone.
The euro surpassed the psychologically important $1.20 mark for the first time since January 2015 on Tuesday. The euro now looks on course to reverse most of its 2014/15 fall against the dollar. The common currency is still worth about 11% less in dollar terms than three years ago however, when it started an eight-month slide against the greenback.
Is euro strength a problem?
The current euro rally is eight months old, suggesting it could be close to its end. After all, the common currency’s latest rally this week has been triggered by ECB-president Mario Draghi not mentioning the euro’s strength in his Jackson Hole speech. The market’s enthusiastic response to this is questionable, as Draghi’s speech was probably written weeks, if not months ago.
To think that euro strength is not a problem for the central bank just because Draghi didn’t mention it is wrong, believes Jaisal Pastakia, investment manager at Heartwoord Investment Management, a subsidiary of Sweden’s Handelsbanken.
“The strength of the euro is a concern for the European Central Bank, which is endeavouring to lift inflation to target,” he said.
“Furthermore, investor positioning is extended in the euro versus the US dollar and potentially at risk of being unwound. While the euro seems to be the market’s favourite for now, it is likely to see more mixed performance going forward – after having done so well.”