The euro fell on Tuesday as European Central Bank President Christine Lagarde attempted to temper expectations of interest rate hikes, which had pushed the currency to a three-week high last week. Markets were caught off guard by the ECB’s hawkish turn last week. It sent rates on peripheral eurozone debt rising as investors fretted about the impact of faster-than-expected monetary tightening on the most indebted nations’ bonds.
The fears were most apparent for peripheral economies like Italy, where 10-year bond rates have risen to their highest levels since May 2020. Meanwhile, inflation-adjusted yields are only a smidgeon above positive territory; it has gained 50 basis points since the ECB policy decision.
How Are the Rates Changing?
On Tuesday, the euro was down 0.1 %, trying to stay above the $1.14 mark. On Friday, it reached a high of $1.1483, the highest level since January 14. Investors were also keeping a close eye on the future course of interest rates between the US and Europe.
Money markets expected the US Federal Reserve to raise rates by up to 134 basis points in the second half of 2022. However, analysts expected the European Central Bank to hike rates by 50 basis points.
Still, the short-term picture has shifted in favor of the euro, with the closely observed bond yield difference between US and German 10-year notes falling to roughly 170 basis points in late January, down from a peak of 194 basis points in April.
The dollar index inched up 0.1 % to 95.51 cents.
Bitcoin and the Australian dollar gained on Monday as European stock markets surged. However, the latter was weaker on Tuesday as Asia remained cautious. At $0.7120, the Australian dollar was essentially steady. On Monday, Bitcoin surpassed its 50-day average for the first time in nearly a month, topping $44,000 for the first time in nearly a month; it remained there in Asia for a gain of more than 17% in four sessions.
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