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Euro's Strength Could Pressure The Bloc's Inflation Rate

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The euro traded steadily above $1.36 on Monday morning as the dollar battled damage from the US government's two week shutdown. The common currency traded at $1.3675 at 5:00 GMT on Monday morning.

The dollar has been on the decline since the US government passed a bill which temporarily reopened the Federal government and extended the nation's borrowing authority until early 2014.

Related; Market Primer: Monday, October 21: Delayed Payrolls Data Ignites Taper Talk

Damage from the shutdown coupled with expectations that the nation will face a similar political battle in a few months has most expecting the Federal Reserve will continue with its stimulus spending well into 2014.

The euro's upward climb will likely strain exports and the bloc's fragile recovery, however most aren't expecting the European Central Bank to step in just yet. At the beginning of October, ECB President Mario Draghi repeatedly claimed that the exchange rate is not a policy target for the bank. Despite that, some analysts believe that the ECB may see cause to step in if the euro's strength puts more pressure on the bloc's inflation rate. Should it drop below one percent, the ECB could voice some concern at its November 7th policy meeting.

For now, eurozone policy makers are focused on improving the region's banking system. Bloombergreported that talks in Luxembourg on October 14-15 resulted in a divide between finance ministers who believe in enhancing backstops and those who think the existing options are sufficient.

German Finance Minister Wolfgang Schaeuble has openly resisted EU-wide backstops, saying banks should instead rely on national resources and private investors. On the other hand, Mario Draghi has been pushing for new mechanisms that will allow banks to access public aid without junior bondholders taking losses.

Posted-In: European Central Bank Mario Draghi Wolfgang SchaeubleNews Eurozone Forex Global Markets Best of Benzinga

 

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