In fluctuating trading on Wednesday ahead of the anticipated rate rise from the European Central Bank, the dollar dropped to a one-month low before rising on Thursday (ECB).
The dollar has fallen recently due to investors’ excitement about indications that the US Federal Reserve may consider easing up on its aggressive rate rises in December. However, the dollar turned around on Thursday in what experts saw as a natural rebound following a sharp loss. On Thursday, the euro reached a high of $1.0094, surpassing the previous month’s high, before dropping as the dollar became stronger. Before the ECB’s announcement at 12:15 GMT, it was recently down 0.47% at $1.0032.
What Does CB Predict?
To reach 1.5%, a 13-year high, the central bank should increase its deposit rate by 75 basis points (bps). A significant subsidy to commercial banks is also probably to be recovered. Alvin Tan, head of Asia FX strategy at RBC Capital Markets, said that he thinks that a little profit-taking at this level is not unheard of. Over the previous two days, the dollar has moved quite a bit, with the euro-dollar up about 2.2% since Monday. The dollar increased 0.54% to 110.14 when measured against a basket of currencies earlier on Thursday, hitting a one-month low of 109.53. Sterling dropped to $1.1561 by 0.59%.
Early London trade saw a more than 0.5% increase in the Japanese yen, reaching a45.11 to the dollar. However, it eventually reversed gains to be fairly steady at 146.34. Trading has been erratic following alleged government interventions to support the struggling currency on Friday and Monday.
According to Themos Fiotakis, head of FX strategy at Barclays, the ECB meeting might cause some volatility in the euro if the governing council debates whether to reduce its holdings of government bonds through quantitative tightening (QT) (LON: BARC). QT is not favorable for the euro. He added that it would probably increase borrowing rates for countries with weaker economies, like Italy, which is typically bad for the euro.