USD maintaining strong positions while Euro struggles
As investors and analysts await to see if the Federal Reserve Board will raise interest rates next month, the U.S. dollar has been maintaining a good position against most major currencies.
At the same time, concerns in Europe over the upcoming French election has the euro struggling.
Last week, Fed chair Janet Yellen said that she, along with several other members of the Fed, believe the time is ripe for an interest rate hike soon, as there is some concern that the unemployment rate will drop so far as to spike inflation and force the Fed to raise interest rates faster and higher than planned. The unemployment rate for January was at 4.8%, slightly up December’s 4.7%. In December, the Fed raised the interest rate from 0.5% to 0.75%, the first hike since December 2015 when it raised the rate for the first time in more than decade. At the time, Yellen indicated that we could expect 2-3 additional hikes in 2017, but she did not say when they were likely to be.
For now, as analysts await a decision, the USD closed higher against the Canadian dollar, the euro, and the British pound on Wednesday. EUR/USD fell to it’s lowest point since January 11, before rising slightly and closing at 1.0512, the GBP/USD slipped to 1.2445, and the USD/CAD hit its highest in two weeks at 1.3193. The USD/JPY did falter slightly, closing at 113.2030. While this is lower than its recent peak of 118.2410 in mid-December, it still represents an increase of 13% in the last half year. The U.S. Dollar Index, which measures the strength of the greenback against a basket of six foreign currencies, rose yesterday 0.15% to close at 101.60, which was its highest in a week.
The euro, on the other hand, seems to be in a virtual free fall. At this point, Marine le Pen of the far right National Front appears to be leading the polls for the French presidential election. Le Pen is a staunch advocate of France pulling out of the European Union, and the fear that investors have of this possibility is reflected in the weakening euro. On Wednesday, the euro did recover slightly towards the end of the day after centrist candidate Francois Bayrou withdrew from the race and threw his support behind independent Emmanuel Macron. Bayrou and Macron were essentially vying for the same voter base, and with both in the running, le Pen stood a much stronger chance of winning at least the first round of the election. Since the beginning of February, the EUR/USD has fallen nearly 3%, since the beginning of the year the EUR/JPY has also dropped 3% and the EUR/GBP has slipped 4% since the middle of January.
Right now, investors are encouraged to watch the watching the French elections very closely before committing to the euro too strongly. Last year, the euro dropped steadily from the day England voted to leave the EU until the end of the year, and the British pound plummeted 10% in the first day and 15% by the end of 2016.