Market participants are likely to shift capital to the US dollar

After two weeks of decline, last week the dollar exchange rate on currency markets rose sharply, as the US central bank announced a reduction in stimulus monetary programs.

The euro exchange rate against the US dollar fell by 1.7 percent last week, to 1.3120 dollars, and on Friday at one point, for the first time in two weeks, it dipped below the level of 1.31 dollars.

The dollar also strengthened against the Japanese currency, by 3.7 percent, to 97.80 yen.

The euro also strengthened against the Japanese currency, with its price jumping by 2.3 percent, to 128.40 yen.

At the beginning of last week, the euro exchange rate reached 1.3399 dollars, the highest level in four months, but since Wednesday, when Fed Chairman Ben Bernanke announced a reduction in stimulus measures, the dollar has been on an upward trajectory.

After a two-day meeting of Fed leaders, the central bank’s chairman stated that the US economy is strong enough for the Fed to begin reducing the purchase programs for government and mortgage bonds later this year, and possibly eliminate them entirely by mid-next year.

This has sparked speculation that the Fed could also raise interest rates in the second half of next year, which has fueled the dollar’s strength against the euro, as further interest rate cuts are expected in the eurozone due to the recession.

In addition to the difference in interest rates, the rise of the dollar is also driven by better macroeconomic data than in other major world economies.

“I expect the trend of dollar strengthening to continue. A series of better economic data from the US and likely reduction of monetary stimulus towards the end of the year will support such a trend,” says Neil Jones, director at Mizuho Corporate Bank.

Analysts say that the announcement of a reduction in monetary stimulus in the US has confused investors who are now contemplating where to direct their investments, and such a situation will likely also benefit the dollar, which is considered a safe haven for capital in uncertain times.

“Market participants are likely to shift capital to the US dollar until there is more clarity on the direction in which the global situation is developing. This benefits the dollar, and my impression is that this situation will continue,” said Jones.

On the other hand, the position of the euro is complicated by the rise in yields on bonds from countries in the peripheral southern part of Europe, given the sell-off in global bond markets. Investors are also concerned about renewed political turmoil in Greece, and further deterioration of the situation could prompt additional weakening of the single currency.

Some analysts predict that the dollar exchange rate will soon return above 100 yen as forecasts for tightening monetary policy in the US contrast with aggressive monetary easing in Japan.