Euro Trades Above $1.40 on Expectation of Higher Rates

Posted Mar 7th 2011 7:00AM by Connie Madon
Filed under: International Markets, Market Matters, Federal Reserve, Currency

euro The markets were full of contradictions last week. Take for example the turmoil in the Middle East. In past crises, investors flocked to the U.S. dollar. But not this time. The U.S. dollar futures contract fell to 76.41 last week.

Another contradiction: the U.S. jobs report was the best in two years, with 192,000 new jobs added. The stock market should have rallied strongly. Instead the Dow fell 88 points. The crises in Libya and elsewhere overshadowed the favorable jobs picture.

Traders and investors are no doubt scratching their heads wondering what's going on. And there is another background issue that driving the currency markets. It's the European Central Bank's (ECB) hawkish stance on interest rates. Europe is moving toward a rate hike as soon as April. That drove the euro to $1.40, as reported in the Wall Street Journal (subscription required).

That rumor has traders scrambling for euros and the Swiss francs. The Swiss franc in particular is seen as a safe haven currency.

With the U.S. Federal Reserve still printing $600 billion in new money and keeping interest rates near zero, traders have decided that the best play is to buy euros and Swiss francs, and to sell U.S. dollars.

Europe finds itself in a catch-22 situation. A stronger euro is a favorable factor. However the stronger euro would hamper Europe's export business. One reason U.S. exports are strong is the weak U.S. dollar.

Then too, Europe is dealing with the eurozone sovereign debt crisis. How all of these intertwining issues are resolved is still up for grabs.

Tags: currency, ECB, euro, European Central Bank, exports, Federal Reserve, interest rates, inthenews, U.S. dollar, zero interest rates