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Euro hit one-year highs against dollar following Draghi comments

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On Wednesday, the Euro reached one-year highs against the dollar after Mario Draghi's speech to a major banking conference. The U.S. dollar index sank to multi-month lows following recent developments in Washington and remarks from officials at the Federal Reserve.

 

The EUR/USD pair reached its highest levels since June 24 last year, hitting 1.1379, and at 07.30 GMT (03.30 ET) was up 0.3 percent for the day on 1.1371. CMS Markets' Colin Cieszynski noted that the Euro had been the best performing currency for two days running.

 

Tuesday saw the currency pair's biggest one-day percentage gain since June last year, with an increase of 1.39 percent. This followed upbeat comments in European Central Bank President Mario Draghi's speech at the ECB Forum on Central Banking in Sinta, Portugal.

 

Draghi made three main points in his speech, which was widely seen as a change in tone from the central bank. His first message was to state his confidence that monetary policy is effective. He said that all signs point to strengthening and recovery in the Euro area, and that deflationary forces had been replaced by reflationary ones. He went on to say that that although there are factors that are still weighing on inflation, they are mainly temporary factors that the central bank can typically look through. He finally added a note of prudence, saying that the bank's stimulus would be withdrawn only gradually as the economy improves in the euro zone. Draghi's remarks led investors to speculate that the European Central Bank's quantitative easing program might soon be unwound.

 

The common European currency also hit highs against the UK pound and the Japanese yen. The EUR/JPY pair reached overnight highs of 127.84, the highest for fourteen months, before dropping to 127.62. Against the pound, the Euro reached its highest level since November, hitting 0.8880 overnight.

 

As well as the dollar falling against the euro, the U.S. dollar index also fell by 1 percent on Tuesday, followed by another drop of 22 percent to 95.98. The U.S. dollar index measures the currency's strength against a weighted basket of six currencies with which the dollar is traded. The euro weighs heavily in the index at 57.6 percent, due to it subsuming several of the currencies which made up the original index when the single currency was created.

 

Events in Washington affected the performance of the dollar this week, as Senate Republican leaders postponed voting on the healthcare bill until after the fourth of July recess. Republican Senate majority leader Mitch McConnell was forced to announce the delay in order to find more support for the bill, which aims to replace Obama's Affordable Care Act. With both moderate and conservative Republicans needing to be won over, the administration faces a delicate balancing act to persuade enough senators to vote for the bill, fueling speculation about its future. The delay is a blow to the Trump administration which made repeal of Obamacare a major campaign pledge. Uncertainty around the delayed vote has undermined faith in the administration's ability to implement fiscal measures such as tax cuts and stimulus packages before the healthcare bill is passed.

 

Federal Reserve Chair Janet Yellen said in a speech on Tuesday that the U.S. central bank would raise interest rates gradually to levels that will remain quite low by historical standards. She also said that the Fed will reduce its balance sheet gradually and predictably. Speeches from officials at the Federal Reserve have been closely watched by the market following its projection earlier this month that it will raise interest rates one more time this year, in spite of the inflation outlook being below expectations.

 

The low rate of inflation has led to questions over the Federal Reserve's raising of interest rates. Having criticized the Fed for not acting sooner, some investors are now suggesting that it is not the right time for a hike, fearing that the policy might keep inflation expectations below target for some time. It is anticipated by many that the tightening of Federal Reserve policy could be slower than that wanted by the policymakers.If you want to profit from such currency highs and lows visit CMC Markets to find out how.

 

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