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Euro ends 2017 on high note

The euro was able to end 2017 strongly. It won against all major currencies and gained 15% against the dollar this year. This rise resulted in a closing price of around 1.20 on Friday 29 December 2017.

Worrying start

There was pessimism at the beginning of the year due to worries about populism taking center stage in the Dutch, French and German elections all which would take place later that year. These worries were mainly due to the election of Mr. Trump as the president of the United States. It showed that populism was on the rise and could very well become the mainstream ideology in several countries.
Besides these political worries, there was Theresa May who was going to officially trigger Article 50 in March. This was going to kick-off the UK’s Brexit negotiations 1https://www.nytimes.com/2017/03/29/world/europe/brexit-uk-eu-article-50.html.

Light after darkness

These worries about populism eroded away later in the year. In part due to, first, the Dutch elections in March that the VVD of Mark Rutte won, with the PVV of Geert Wilders becoming the second largest party 2http://deredactie.be/cm/vrtnieuws/buitenland/1.2919633#. Second, was the French presidential election that took place on 23 April 2017 (first round) and 7 May 2017 (second round). In the end, Emmanuel Macron won with 66.1% of the votes against Marine Le Pen who did receive 33.9% of the votes. With two of the three major elections out of the way, traders were becoming more optimistic which started pushing the euro higher. The German elections finally proved that populism wasn’t taking over Europe and the EU wasn’t nearing its end.

Mario DraghiWith the political stage set in the EU, the climb of the euro took steam. It received an additional push in June thanks to a hawkish Mario Draghi during the bank’s annual conference in Sintra, Portugal, on the 27th 3https://www.ft.com/content/83b9a08e-5b18-11e7-9bc8-8055f264aa8b. The CPI 4Consumer Price Index and unemployment were solid in July and the GDP rose to 2.3% YoY in September 5https://www.ft.com/content/d28f87df-ad13-3f34-974b-2ab436a4f6e8, pushing the euro above 1.20 for the first time in over two years.

Several ECB members were quick to talk the euro down back below 1.20 early September. A strong euro is detrimental to the growth and the inflation in the eurozone, all the while the inflation in the eurozone hasn’t reached a level ‘close to but not 2%’.

Dollar worries

It’s not solely thanks to the euro that it grew so much in 2017. In September former ECB president Jean-Claude Tricet told CNBC 6https://www.cnbc.com/2017/09/01/euro-rally-is-actually-a-dollar-problem-says-former-ecb-president.html:

There are a lot of factors (for the euro’s strength). The real economy in Europe is picking up now very, very visibly,” he said about the attractiveness of the euro.Jean-Claude Trichet

That being said I think that the U.S. difficulty and particularly the hesitation on what to do as regards (with) new investment, as regards (with) taxation and so forth – and the difficulty of the present (U.S.) administration are playing also an important role. Because the problem is more that the dollar is weak vis-à-vis all currencies (rather) than the euro is very strong vis-à-vis all currencies.

The dollar was one of the biggest victims of the euro rally. The weak performance of the greenback was due to a variety of factors.

First of, the dollar was already overbought against the euro in the beginning of 2017. Furthermore, there were issues with president Trump’s plans. It took until Christmas for a tax plan to get signed. He also hasn’t provided a new infrastructure plan. Finally, the Fed can afford some leniency in its rate hikes thanks to the inflation maturing slower than expected and still below the level of about 2%.

The euro can present a whopping 15% and more increase against the dollar and similar impressive figures against other currencies.

 

Source:

  • Article: Sterkste stijging euro tegenover dollar in 14 jaar (2017, December 29). De Tijd, p. 24.

References   [ + ]

1. https://www.nytimes.com/2017/03/29/world/europe/brexit-uk-eu-article-50.html
2. http://deredactie.be/cm/vrtnieuws/buitenland/1.2919633#
3. https://www.ft.com/content/83b9a08e-5b18-11e7-9bc8-8055f264aa8b
4. Consumer Price Index
5. https://www.ft.com/content/d28f87df-ad13-3f34-974b-2ab436a4f6e8
6. https://www.cnbc.com/2017/09/01/euro-rally-is-actually-a-dollar-problem-says-former-ecb-president.html
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