NEWS / Foreign Exchange

The euro rose to a 2-year high versus the dollar yesterday

The euro rose to a 2-year high versus the dollar yesterday. Although there was no obvious catalyst to explain the timing of the move, German industrial production data for February printed much stronger than most investors had expected earlier in the morning. Indeed, the German economy as well as the overall Eurozone economy have held up much better so far this year than most market participants had anticipated. Although the European Central Bank likely will remain on hold at its policy meeting next Thursday, further ECB tightening seems likely in the months ahead. Narrowing interest rate differentials and central bank diversification away from the dollar have helped to boost the euro over the past few months. In our view, a test of the all-time high in the dollars/euro exchange rate, which lies only 2% above current levels, is only a matter of time.

Indeed, further euro appreciation could come as early as this morning if the U.S. labor market report for March disappoints. The market consensus forecast anticipates that non-farm payrolls rose by about 130,000 last month. The unemployment rate is expected to have edged up from 4.5% in February to 4.6% in March. Weaker-than-expected numbers would raise concerns about the outlook for consumer spending, which has helped to offset the drag on the economy from the downturn in the housing market. In that event, the dollar likely would weaken further on heightened expectations of Fed easing. On the other, stronger-than-expected numbers this morning could give the greenback some reprieve. That said, trading likely will quiet down later this morning as market participants head home early. Indeed, European financial markets are closed today in observance of Good Friday.