Week in FX Europe – Dollar Perception Has the EUR Appreciating

Quantitative Easing or QE has been the main driver of exchange rates and it will probably remain this way for some time. The change in the balance sheet values of the ECB and the Fed has had an extreme effect on the value of the ‘single' currency. More importantly, the Fed and ECB actions over the past week points towards a continuation of this EUR strength.

When the Fed gets to add liquidity via QE, it expands it's own balance sheet in relation to that of the ECB's, hence the spread between the two entities grows. Historically, the dollar begins to slide. When the ECB does it, the spread narrows and the EUR is now on that slippery slope.

Confidence in the European banking system has also been boosted in recent weeks, as some European banks agree to payback their three-year LTRO loans two-year's early to the ECB. This will help to reduce the debt on the central banks balance sheet and give the EUR a boost.

This balance sheet...