Euro strengthened in a quiet holiday week

In sparse holiday trading last week, the euro strengthened against the dollar following new data indicating a weakening U.S. economy, as well as hints that interest rates in the eurozone could remain unchanged.

The euro exchange rate against the U.S. dollar rose by 1.2 percent last week, to 1.4060 dollars, and during that shortened trading week, it ranged from 1.3903 to 1.4125 dollars. The euro also strengthened against the Japanese currency, by 2.6 percent, to 127.12 yen. The U.S. dollar also strengthened against the yen last week, with the dollar exchange rate rising by 1.5 percent, to 90.4 yen, moving away from the lowest level in the last 13 years of 87.13 yen, which it fell to about ten days ago.

In November, sales and prices of existing homes in the U.S. recorded a record decline, indicating that the real estate market is still not stabilizing. These data negatively impacted the U.S. currency. “Although these data did not surprise anyone, they certainly did not help the trend of the dollar’s movement. In conditions of lower liquidity, the dollar tends to weaken,” says Jeremy Stretch, currency strategist at Rabobank in London.

The strength of the euro is also attributed to speculation that the European Central Bank, after recent cuts, could keep interest rates unchanged at 2.5 percent for some time, which is higher than the British 2.0 percent and nearly zero percent in the U.S. ECB President Jean-Claude Trichet did not provide specific guidance regarding the further direction of the ECB’s monetary policy in a public address on Tuesday. Refusing to comment on the possibility of further rate cuts, Trichet stated that the ECB would do whatever is necessary to maintain price stability and signaled that the central bank does not want an excessively low inflation rate.

Among other currencies, the British pound stood out last week, significantly weakening against the euro under pressure from fears of a new rate cut by the British central bank following the release of pessimistic data on economic growth in the third quarter amid the global financial crisis. The British economy thus weakened by 0.6 percent in the three months to September, marking the strongest quarterly decline recorded since 1990. In response, the pound was nearly at parity with the euro, weakening to 94.05 pence per euro. “This was a typical pre-Christmas week marked by limited activity and, compared to recent periods, modest ranges of currency movements,” analysts from the British company Moneycorp assess the situation in the markets. (H)