The European Single Currency, euro, shot to a three-year high on Monday, January 15, as optimism around growth buoyed expectations of tighter monetary policy from European Central Bank, while the chance of a pro-European Union coalition in Germany also boosted confidence in the continent.
With the world in general and Europe in particular showing signs of sustained economic growth, global stock benchmarks jumped to new highs, even though investors are now pricing in the withdrawal of central banks’ stimulus.
The single currency climbed as much as 0.8 percent to $1.22965 at one stage on Monday, a price last seen in December 2014, just before the ECB first announced its government bond purchase program.
In addition, Bank of Japan Governor Haruhiko Kuroda offered a positive view on his nation’s economy and inflation on Monday, sending the yen to a four-month high against the dollar.
“The latest leg up in the euro has clearly come from optimism that the German government is moving towards an agreement for a coalition government,” said Investec economist Victoria Clarke.
German Chancellor Angela Merkel’s CDU party and the Social Democrats (SPD) are moving towards formal coalition talks, soothing concerns around Europe’s largest economy.
The SPD’s pro-European stance – leader Martin Schulz recently argued for a “United States of Europe” – also strengthens the case for investment in the euro.
“This follows an earlier move triggered by the crucial line in the ECB account which has got people thinking about when the first move on rates will happen,” said Clarke.
Euro zone money markets now price in a 70 percent chance of a 10-basis-point rate increase by the ECB by the end of the year, up from 50 percent a week before.
The strength in the euro pushed European stocks a touch lower, as exporters were hit by the currency strength. An index of pan-European stocks was down 0.1 percent on the day, but still not far from multi-year high hit last week.
The slight decline comes in the wider context of boom for stocks so far in 2018, as investors bask in strong growth numbers from most of the world’s largest economies.
Meanwhile, the dollar index dropped to fresh troughs on Monday, with strength in the euro helping to push it down half a percent against a basket of six major currencies, to its lowest in more than three years.
