A fall in the euro to parity versus the dollar is now viewed by many analysts as a matter of when not if. But how quickly it happens could rest on just one person: the chair of the U.S. Federal Reserve.
The U.S. central bank meets next week and whether or not Fed chair Janet Yellen signals a rise in U.S. interest rates in the months ahead is likely to be the trigger for the next major euro sell-off, analysts say.
The euro rose for the first time in two weeks on Thursday, trading at around $1.0585, and bouncing off the previous day's 12-year lows. It has fallen fast and furious in recent weeks against a backdrop of monetary stimulus in the euro zone and expectations of monetary tightening from the Fed this year.
And what role does the Fed play in this parity debate? Well, say analysts, if Yellen removes the key phrase "patient" from the Fed's statement, this would be interpreted by markets as signal that a June rate hike is on the cards.
A rate rise would increase the yield differential between the dollar and the euro – pulling the single currency lower. On the other hand, if the Fed continues to express patience about the economic outlook, the dollar could give up some of its recent gains.
Analysts cite two other reasons why currencies are key to the Fed's meeting next week. First there's the volatility that the talk of higher U.S. rates is having on global markets – after all it's not just the euro that has slumped against the dollar this week – the Brazilian real, the Turkish lira and South African rand have all hit multi-year lows.
Second, the surge in the dollar's value weakens the outlook for U.S. manufacturing and exports.
25 Canada Square, Level 33, office 50, Canary Wharf London, E14 5LQ +44 20 3608 6256
World Financial Markets - 0700 17 600 Varchev Exchange - 0700 115 44
Varchev Finance Ltd is registered in the FCA (FINANCIAL CONDUCT AUTHORITY) with a passport in the United Kingdom: FCA, United Kingdom - registration number: 494 045, which allows provision of financial services in the United Kingdom.
Varchev Finance Ltd strictly comply with the statutes of the European directive MiFID (Markets in Financial Instruments). targeting increased efficiency, transparency and uniformity of financial instruments.
Varchev Finance Ltd is authorized and regulated by the Financial Supervision Commission - Sofia, Bulgaria: License number RG-03-02-05 / 15.03.2006
The information on this site is not intended for distribution or use by any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.
Disclaimer:
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 63,41% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.