Euro Sinks As The Fed And The ECB Diverge

The euro fell below $1.36 on Tuesday morning as markets began to digest the ECB’s stimulus efforts. The common currency traded at $1.3591 at 7:45 GMT as the gap between eurozone and US Treasury yields widened.

Reuters reported that analysts see the euro facing further downward pressure in the near term if interest rate differentials between the US and the eurozone continue to widen.  The spread between two-year German bond yields and US Treasury yields grew above 36 basis points this week, the widest gap since 2007.

With the European Central Bank and the US Federal Reserve moving in opposite directions now, dollar-denominated assets are seeing increased momentum. Investors are drawn to higher bond yields, thus widening the gap further.

Most expect this trend to continue as long as the US Federal Reserve maintains its tapering schedule and continues to withdraw its stimulus spending each month.  Data from the US has been strong enough to keep the Fed from changing course, allowing the dollar to rise and providing momentum for US bond yields.

On Friday, the US released another encouraging economic report that showed US job creation was better than expected. The nation’s non-farm payrolls report showed that US employers added 288,000 new jobs in May, surpassing even the most optimistic estimates. The report supported growing expectations that the US economy picked up the pace in the second quarter and also provided reason to believe that current estimates for when the Fed will increase interest rates are on track.