The euro has enjoyed a strong August rally, reaching a one-year high against the dollar on Wednesday, but cautious comments from Federal Reserve Chairman Jerome Powell on Friday could reverse that momentum. The euro has long been the easiest way for market participants to bet against the U.S. economy because sellers can easily find buyers and vice versa.
The EUR/USD currency pair has a daily trading volume of approximately $2.29 trillion, accounting for approximately one-third of global foreign exchange trading volume!
Money managers betting the Federal Reserve is heading into a rate-cutting week have snapped up euros every day for the past two weeks, according to Bank of New York Mellon, the world's largest custodian bank with access to more than $45 trillion in assets.
Robot traders are also getting in on the action. Managers who use computer algorithms to chase the latest market trends have sold $70 billion to $80 billion so far this month. The euro has been one of the main beneficiaries, according to UBS Group AG.
All this has pushed the euro up 3% against the dollar since the beginning of the month, rising as high as 1.1143 on Wednesday, the strongest since July last year. Revised U.S. employment data supported bets on the Federal Reserve's interest rate cuts, providing additional impetus for the euro.
However, as central bankers from around the world convene in Jackson Hole,
With the euro zone's central bank and European economic growth still sluggish, many fear the euro's fortunes are about to turn. Strategists say Powell or his deputies need only push back against the rate cuts that the market is suggesting. That would signal that U.S. rates will remain high relative to Europe, which has already begun cutting rates, boosting the dollar's appeal.
The euro is "the main beneficiary of the continued decline in U.S. interest rate expectations and improved risk appetite," said Geoff Yu, senior strategist at Bank of New York Mellon. "But this is not an entirely positive story for the euro, and the current macro situation in Europe remains very weak." The euro's rise may have more to do with its superior liquidity than any fundamental changes in the region's economic outlook.