Here is something we didn’t think we’d be saying so soon: the euro is having a good time.
The currency of the European Union went through some serious hardship over the past decade – it suffered immensely in the global recession of 2008, the debt crisis in some EU countries such as Greece and Portugal, which eventually led to further internal conflicts and more trouble for Europe’s unity as the United Kingdom announced its intention to leave and the fear of losing more members spread as Italy and France held elections recently.
However, this bleak phase for the euro seems to be approaching an end. Despite small daily fluctuations, which occur naturally when there’s global activity on the financial markets, the euro was able to climb up and is currently in its strongest levels since 2011, according to Reuters.
Part of the reason why this is a little surprising is the fact that the European Central Bank, the EU’s organ for monetary policy, has been implementing a stimulus program to boost the European economy by encouraging inflation, something that logically decreases the value of the euro versus other major currencies. It has already been two years since the program began and investors as well as the ECB itself initially expected to continue with this approach for a few years. Nevertheless, recent data from the European Union shows the economy is doing quite well, which prompted ECB President Mario Draghi to show willingness to change the course of the current policy as early as September this year.
A readiness to gradually terminate the stimulus program means that as inflation stabilizes, the ECB will prepare to start moving in the opposite direction and look to raise interest rates, which would inevitably boost the euro’s value. This is what the Federal Reserve in the United States has been doing in the past two years, as reflected by the strong American dollar.
In fact, according to the economic data the EU has a more promising economic growth than the US. Now investors are beginning to prepare for a future interest rate increase, perhaps in the summer of 2018. We also learned that the UK is seeking to increase rates in the near future as well in a statement by Bank of England’s Mark Carney earlier this week.
Interestingly enough, the value of the euro is also boosted by the weakening of the dollar, which is suffering for political rather than economic reasons.
