Dollar and yen less attractive after stock recovery on global exchanges

The euro strengthened against the US and Japanese currencies last week, recovering some of the losses from the beginning of the year, with the rise of the European currency attributed to an increased investor appetite for risk.

The exchange rate of the euro against the US dollar rose by 1.2 percent last week, to 1.2934 dollars, marking its first weekly increase this year. However, the euro’s price is about 12 percent lower compared to December of last year, when the euro was worth 1.47 dollars. Against the Japanese currency, the euro’s price increased by 2.1 percent last week, to 118.9 yen, while the dollar’s exchange rate against the yen jumped by 2.2 percent, to 91.96 yen.

Stock prices on global exchanges significantly recovered last week, as investors hope that new measures to stimulate the economy and bank bailouts in the US will soon be approved by Congress and revive the American economy. This has led to an increased investor appetite for risk, causing the US dollar and Japanese yen, typically safe havens for capital in uncertain times, to lose their attractiveness.

Leaders of the European Central Bank decided at last week’s meeting that the key interest rate remains unchanged at 2 percent. However, ECB President Jean-Claude Trichet signaled that the bank could continue the monetary policy easing cycle in the eurozone in March. The Bank of England, on the other hand, reduced the key interest rate on Thursday by 0.50 percentage points, to 1 percent, the lowest level in history, in an effort to stimulate economic recovery. Although such decisions usually diminish the attractiveness of currencies, investors expect them to positively impact the British economy. Therefore, the pound strengthened against both the euro and the dollar, trading at 1.467 dollars, its highest level in two weeks.

“If the BoE has finished lowering interest rates and the ECB is still expected to continue cuts, then the impact of interest rates will be reduced in terms of negative consequences for the pound,” concludes Rabobank strategist Jeremy Stretch. (H)