Having touched a low of USD 1.20 in July, the Euro strengthened from August to October. The turning point was set by the European Central Bank. The creation of the Outright Monetary Transaction programme helped in easing financial market tensions and private funds from abroad flowing back into the peripheral Eurozone countries. Also further progress on the restructuring of the Spanish banking sector based on a sharp reduction in the size of their balance sheets and the creation of a “bad bank” has been supportive to calm down financial markets and stifled speculation on disintegration of the Eurozone and the fall of the Euro.
Meanwhile, rising investor concerns about the US fiscal cliff had contributed to the US dollar losing some strength at the end of 2012.
In early 2013, the Euro strengthened further, to around USD 1.35. A further appreciation of the Euro could seriously reduce the competitiveness of Eurozone exports, particularly from the distressed countries.
Taking into account the weak economic outlook for 2013, a further significant strengthening of the Euro does not seem very likely. Concerns about the European sovereign debt crisis could easily re-emerge.
The mild improvement in global economic fundamentals foreseen for
the 2013-2014 should result in a gradual decline in risk aversion and the US dollar to some extent losing its safe-haven role. This could contribute to a mild further strengthening of the Euro.
Source - EUROFER
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