Euro strengthens against the US dollar on improved risk appetite

The euro strengthened against the US dollar on Friday and yesterday, as improved investor appetite for risk increased demand for the single currency. In an interrupted day’s trading because of public holidays, the single currency strengthened against the greenback as strong equity market performance in Europe and elsewhere buoyed investor mood for the perceived riskier currencies. However, the euro’s gains were capped against the greenback yesterday as investor wariness heightened ahead of the European Central Bank’s policy meeting on Thursday, as investors speculated about whether the central bank will introduce a quantitative easing program like the Bank of England and the US Fed. According to analysts, it appears almost inevitable that the ECB will cut interest rates by a further 25 basis points to 1%, however what other measures they intend to implement to get the eurozone economy out of recession remains to be seen. Speculation surrounding this issue was further fanned yesterday as the European Commission produced a very downbeat report for some of the EU’s main powerhouses’ prospects for getting out of recession. It predicted Germany’s economy would contract by 5.4% this year, Italy’s by 4.4% and Ireland’s by 9%. The euro’s gains were also capped yesterday as speculation surrounding the results of the US government’s “stress tests” on 19 of America’s major banks weighed on investor sentiment. It is predicted the tests will show the banks would need more capital in the event of severe and prolonged deterioration in the global economy, meaning further government bailouts cannot be ruled out. These results capped the euro’s gains against the dollar, although it still finished up on the day at 1.3405.

In early trading today, the euro has pared some of the gains it made against the dollar yesterday as investor cautiousness ahead of the ECB’s policy meeting resurfaced. There are no major announcements in the eurozone or US today, so all eyes will be on the central bank ahead of their meeting later this week. Investors will also be watching closely for any further developments on the US government’s stress tests on major American banks.