1.1700: Euro hits three-month highs as US Bond buyback plan crushes the US Dollar
- EUR/USD surges 1.13% in two days to hit fresh three-month highs above 1.1700.
- US Treasury's plan to double up Bond buybacks has crushed speculative demand for the USD.
- The Fed minutes showed a hawkishly leaning tone, but they failed to stem the US Dollar selloff.
The Euro (EUR) extends gains against an ailing US Dollar (USD) on Thursday, as the US Treasury’s plan to boost buybacks of long-term Government Bonds sent the Greenback tumbling across the board. The EUR/USD pair trades right above 1.1700 at the time of writing after surging about 1.13% from Wednesday’s lows.
The US Treasury Department announced on Wednesday its decision to double the size of liquidity support buyback operations for longer-dated securities, to at least 4 billion per operation, from the current maximum size of $2 billion from September 9 on.
This plan is aimed at easing yields on long-term Government Bonds, under pressure this week, after data from the Treasury Department revealed that national debt rose above $40 trillion, prompting investors to demand higher compensation for holding US debt.
MUFG: Dollar vulnerability grows
Analysts at MUFG affirm that the buy-back announcement, combined with the recent FIMA report comment to Japan following intervention, risks proving “counter-productive” for the US Dollar. In their view, it could lead to “reduced appetite for either holding US assets (UST bond sales) or reduced appetite for exposure to the US dollar (dollar selling) or both.”
MUFG cautions that “even if the Treasury buy-back plan does contain yields, the US dollar now remains more vulnerable to the downside on the fact that yields are potentially lower.”
The Treasury's announcement shadowed the release of the minutes of the Federal Reserve's (Fed) latest monetary policy meeting, which showed a hawkishly leaning tone. The central bank's policymakers highlighted the need for higher rate hikes unless inflationary pressures abate, but failed to stem the US Treasury-inflicted Dollar sell-off.
Euro FAQs
The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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