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Euro's Rally May Have Peaked: Strategist

Thursday, 12 Aug 2010 | 8:36 AM ET

The flight to safety following the Federal Reserve's decision to extend quantitative easing saw the dollar make big gains against the euro and one strategist said the euro's rally may have peaked for now.

The move has led many to question if the euro's gains against the greenback since the euro zone debt crisis abated are about to reverse.

"The dollar's recovery against the euro is, on the face of it, rather surprising given that the FOMC statement essentially rubber-stamped the market's views on US interest rates, whose decline has guided the greenback steadily lower since the markets' crisis of confidence in the euro-zone's debt markets and hence the euro, abated in early June," Neil Mellor, a currency strategist at Bank of New York Mellon, said.

"This is all the more intriguing given the recent run of relatively positive data out of the euro zone. The answer is possibly to be found in the euro-zone debt markets themselves," he said.

"Broadly speaking, over the course of the week, the yield spread for 'periphery' bonds over German Bunds has been on the rise, with ten year spreads rising 33bp, 54bp, 15bp and 22bp on Greek, Irish, Spanish and Portuguese debt respectively," Mellor added.

Greece's gross domestic product was weaker than expected, data showed Thursday, while Spain will need more austerity measures according to an official from the European Central Bank (ECB).

There are signs of confidence ebbing away from Greek and Italian debt, Mellor said.

"In recent days there has also been some renewed selling of French fixed income, and all in all, it is difficult not to contrast this backdrop with the steady, uninterrupted rise in net inflows into the US debt market since the end of last month, during which time Treasury yields broke fresh ground," he noted.

"There are clearly issues to be resolved as far as the euro zone's debt problems are concerned and in view of the profound impact such concerns had over H1, it would be equally remiss to ignore the possibility that we have seen the peak in euro/dollar for the time being," Mellor added.

Contact Europe: Economy

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