Further euro gains are to be expected near-term (page 1 of 2)

Euro

The catalyst for the dollar's sell-off this week were comments from US Treasury Secretary John Snow.

At the end of the G7 meeting in France last week, Snow played down the dollar's losses, saying that currency moves have remained 'fairly modest'. The comments reinforced the view that Washington was happy with a weak dollar. As a result the greenback plunged to a fresh multi-year low of $1.1738 on the first trading day, falling marginally short of its January 1999 launch level of $1.1747.

The greenback recovered some ground later in the day helped in part by remarks from St. Louis President William Poole that the U.S. economy has the potential to grow much more quickly and that the risk of deflation in the U.S. is minor.

On the following day, the greenback came under renewed selling pressure against most major currencies in reaction to comments from billionaire financier George Soros.

In an interview with CNBC, Soros stated that he was now short on the dollar as a result of what John Snow had been saying in recent days. Soros criticised the U.S. administration's new stance on the dollar, calling it a 'beggar thy neighbour' policy that will hurt European and world growth via competitive (US dollar) depreciation.

Also weighing on the U.S. unit were renewed geopolitical fears stemming from the government's raising of the terror alert level to high from elevated. Euro/dollar climbed to a high of 1.1745 but again fell short of its launch level apparently blocked by options-selling.

Midweek, the dollar received a brief respite as Federal Reserve Chairman Alan Greenspan, in his testimony before the Joint Economic Committee, delivered a mixed evaluation of the American economy. Greenspan maintained a cautious tone and characterised the timing and extent of the U.S. economic recovery as uncertain.

Additionally, he sought to offer comfort that the chances of a deflationary environment occurring in the U.S. remained remote and that the Fed possessed plenty of ammunition to combat deflation should it emerge. The single currency retreated to just above $1.16 level on profit taking.

Following the European Central Bank's (ECB) non-policy setting meeting on Thursday, the central bank did not offer a statement regarding interest rates. Although it is unclear whether a rate cut is forthcoming at the June meeting, ECB Governing Council member Welteke said the Bank would certainly deliberate whether another rate cut is necessary at the next meeting. He also acknowledged the adverse impact a stronger euro was having on the German economy.

Separately, French Finance Minister Francis Mer reiterated calls for the ECB to further ease policy, adding that such a move would help stabilise the EUR/USD rate. Meanwhile, jobless claims figures released from the United States again moved market players in euro's favour. Claims rose by 7,000 to 428,000 in the week ended May 17. The reading was higher than forecasts for 415,000 initial claims.

Euro/dollar pierced through its launch rate on the last trading day, as the greenback came under increased selling pressure due to falling U.S. equity futures and the unwillingness of traders to hold the greenback ahead of the long U.S. Memorial Day holiday weekend. EUR/USD surged to fresh four-year highs of $1.1838, in thin volatile trading, within reach of its all life-time high of $1.1886.

Further euro gains are expected in the near-term, throwing an additional burden on struggling European businesses, but probably helping the United States to overcome its own economic hassles through a cheaper dollar.