- The euro has almost returned to the dollar value seen at the start of the year, despite the dollar's colossal rally during March's market volatility, as the coronavirus pandemic spread throughout the world.
- The dollar depreciation over recent days is being fueled by both optimism over the reopening of Western economies and expectations of further stimulus from central banks.
- This EU Recovery Fund should "go a long way to shoring up the region's tricky fiscal architecture," according to Goldman Sachs.
The euro is on course to climb against the dollar for the seventh consecutive day on Wednesday, its longest winning streak since December 2013.
As of Wednesday afternoon, the euro was up 0.2% at $1.1193 — an 11-week high — as the greenback continues to depreciate against most currencies on the back of broad risk-on sentiment from investors.
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The euro has almost returned to the dollar value seen at the start of the year, despite the dollar's colossal rally during March's market volatility, as the coronavirus pandemic spread throughout the world and sent investors running for cover.
The dollar depreciation over recent days is being fueled by both optimism over the reopening of Western economies following prolonged coronavirus-induced lockdowns, with little evidence of a widespread uptick in infections thus far, and expectations of further monetary stimulus measures from central banks.
Despite uncertainties surrounding tensions between the U.S. and China, and mass civil unrest stateside, stock markets have continued to rally steadily over recent days as investors seemingly prioritized the prospect of economic recovery over short-term headwinds.
The euro has emerged as a particular beneficiary of investors' move away from the dollar, which is traditionally seen as a safe-haven.
It comes after the European Commission unveiled plans for a 750 billion euro ($826.5 billion) fund to help the euro zone economy mitigate the damage from the pandemic, consisting of 500 billion euros in grants and 250 billion euros in loans.
This EU Recovery Fund should "go a long way to shoring up the region's tricky fiscal architecture," according to Goldman Sachs.
In a note Tuesday, Goldman Co-heads of Global FX, Kamakshya Trivedi and Zach Pandl, said that if the recovery fund finds support among EU member states, it could represent a "major step towards greater fiscal policy co-ordination in the region." If spread across three years, they suggested, it could double the EU's annual expenditures in one fell swoop.
"Moreover, greater EU-level borrowing would provide a new source of highly rated euro-denominated debt for global investors — a missing feature which many observers have considered a reason why the euro would struggle to compete with the U.S. dollar for a central role in global trade and ﬁnance," Trivedi and Pandl suggested.
Though they anticipated caution from investors towards European assets in the near term, due mostly to low bond yields and sluggish corporate earnings growth, the Goldman analysts said the recent steps towards fiscal integration gave greater conviction that "euro appreciation will be part of broad dollar weakness over time."
Meanwhile, economic data from the euro zone has indicated that while devastating contractions in activity persist, the worst of the crisis may have passed.
Euro zone composite PMI (purchasing managers' index) readings improved in May, but remained around the 30 mark, with 50 separating expansion from contraction. Investors will be closely watching the PMIs for the next couple of months to assess the trajectory of the economic recovery.
The European Central Bank (ECB) is also set to issue its latest monetary policy decision on Thursday, with markets anticipating an increase to its Pandemic Emergency Purchase Programme (PEPP) in order to absorb more of the bloc's debt fueled by the coronavirus.
BMO European Head of FX Strategy Stephen Gallo anticipates that "disappointment risk" could materialize if the increase in the ceiling for the bond-buying program is significantly less than 300 billion euros.
"That would probably be transmitted to FX in the form of EUR strength – particularly vs EM – unless disappointment risk hits some euro zone credit markets hard enough (though the latter is something we do not expect at this stage)," Gallo said in a research note Wednesday.
"But unless the deviation from market expectations is huge, the direct FX impact of the ECB decision should be minor. The weaker USD also raises the bar for the ECB to surpass expectations if it wants a material depreciation of the EUR," he concluded.