Recent rise in euro versus dollar illustrates importance of Fed speculation

The ratio of the euro to the U.S. dollar has been hovering close to its highest point in two years during the last few sessions, and the greenback has been encountering headwinds as more market participants anticipate that the Federal Reserve’s quantitative easing will not be tapered for some time.

These bond purchases have been cited by many as having a significant effect on asset values, and individuals who want to make money through trading different investments such as currency pairs should be aware of the key impact that this stimulus has had on the markets.

Fed continues bond purchases

The Fed has managed to push its balance sheet to more than $3 trillion over the last several years, and has been buying $85 billion worth of debt-based financial instruments every month since late last year.

Many market experts have stated that this stimulus has served to push the value of all assets higher. However, this increasing of the money supply has generally been thought of as putting downward pressure on the value of the U.S. dollar.

The greenback has received headwinds lately as many now believe that the Fed will push back tapering its asset purchases for longer than it would have otherwise because of the impact that the partial shutdown of the U.S. government and the debt ceiling dilemma had on the nation’s recovery.

Government shutdown and QE

Economists have predicted that during the fourth quarter of 2013, the nation’s growth rate for its gross domestic product will be reduced by as much as 0.6 percent, Reuters reported. This perceived decline has been attributed to a drop in the confidence of both businesses and consumers, as well as a reduction in government expenditure.

The EUR/USD pair moved higher on Oct. 25, as global market participants responded both to speculation that the bond purchases of the Fed will be sustained for some time and also strong sentiment surrounding the common currency, according to the media outlet.

The common currency appreciated to as much as $1.3832, which was its highest exchange rate relative to the greenback since November 2011, the news source reported. In the afternoon, the euro was valued slightly lower at $1.3808.

Some currency traders stated that they became anxious when the euro moved to higher than $1.38, according to MarketWatch. These individuals stated that the high exchange rate might point to investors reacting too much to technical analysis, and indicated that it has been making both companies and lawmakers in Europe nervous.

“We have turned tactically negative on [the euro/dollar currency pair], as we expect the [European Central Bank] to ease further if the pair threatens to break upward. The positioning in euro is probably net long versus the dollar, which could also cap the upside for the pair,” strategists at Credit Suisse wrote, the news source reported.

The mindset that global investors had surrounding the euro was not deterred by data indicating that the confidence of businesses in Germany declined recently, according to Reuters. The common currency increased 0.9 percent versus the U.S. dollar during the week, and was 4.6 percent higher for 2013 as of Oct. 25, the media outlet reported.

These gains were enjoyed at a time when economists were predicting that the upcoming Fed policy meeting scheduled to start later in October would not result in key officials announcing any plans to taper.

These market experts expected that the policymakers would indicate that they need to be presented with additional evidence of economic strength before deciding to reduce the bond purchases in volume, according to the news source. ICICI Bank analysts wrote about the key importance that these expectations played in the greenback failing to enjoy significant appreciation on Oct. 25.

“The subdued movement in dollar partly reflects expectation that Fed will maintain its asset-purchase program intact in next week’s policy meeting,” they wrote in a note, the media outlet reported.

The speculation surrounding these bond purchases continued to have an effect on the value of the two currencies on Oct. 28, according to The EUR/USD declined slightly, but still lingered close to its highest level in two years. The value of this currency pair dropped 0.13 percent during the day to reach 1.3786.

Strong economic data helped to push the value of the greenback up slightly, the media outlet reported. U.S. industrial production grew at a rate of 0.6 percent in September. This represented the sharpest growth in seven months, and was higher than the 0.4 percent that was expected.

Amid the recent price movements of the two currencies, some analysts have stated that the euro could rise close to $1.40, according to Reuters. These market experts have stated that the expectations that QE will be sustained will help to limit the future upside of the greenback, which will send those looking to make money by trading currencies to the euro.